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ELEMENTS  OF  ECONOMICS 

FOR 

HIGH  SCHOOLS 

BY 
U.  S.  PARKER,  A.  M. 


H^'i'T 


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111 

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f.3 


COPYRIGHT,    1916 

by — 

U.  vS.  PARKER,  A.  M. 


CHAPTER  I.     OUTLINES  OF  ECONOMIC  HISTORY. 

Page 

1.  Scope    of   economics    2 

2.  Importance  of  study  of  economics    6 

3.  Industrial   evolution   of   society    6 

4.  The    first    two    stages    9 

5.  The    agricultural    stage    9 

6.  The  handicraft  stage    10 

7.  The  factory  stage    12 

8.  Industrial  development  in  U.  S.  to  1815 13 

9.  Development  from  1815  to  1861   14 

10.  Development   since    1861    16 

CHAPTER  II.     LAWS  OF  CONSUMPTION. 

11.  Definitions   20 

12.  The  law  of  satiety    22 

13.  The  law  of  variation  of  utility   23 

14.  Marginal  and  total  utility    23 

15.  The   law  of  demand    25 

16.  The  law  of  elasticity  of  demand    26 

17.  The  law  of  economic  order  of  consumption 28 

18.  Law  of  development  of  wants    30 

19.  EngePs    law    32 

CHAPTER  III.     PROBLEMS  OF  CONSUMPTION. 

20.  The   standard  of   living    34 

21.  The  housing   problem    35 

22.  Evil  conditions 37 

23.  Causes  of  these  conditions  39 

24.  Remedies    40 

25.  The   liquor    problem    43 

26.  Solution   of  the  problem    45 

27.  Extravagance  of  the  rich   46 

CHAPTER  IV.  FACTORS  OF  PRODUCTION 

28.  Production    defined    48 

29.  The  three  factors  of  production    48 

30.  Classification    of   capital    49 

31.  Increase   of   capital    51 

52.  Increase  of  labor:  Law  of  Malthus 53 

33.  Our    immigration    problem    55 

CHAPTER  V.     EFFICIENCY  IN  PRODUCTION. 

34.  Richness  of  natural  resources    58 

35.  Efficiency   of   capital    59 

36.  Efficiency  of  labor    60 

37.  Social   cooperation   in   production    62 

38.  Advantages  of  social  cooperation   63 


364747 


II 

39.  Disadvantag^es  of  social  cooperation    64 

40.  Forms   of  business  organization    66 

41.  CorpoTatio<ns    68 

42.  Advantages  of  corporations    70 

43.  Evils  of  corporations    72 

44.  Economy  of  large-scale  production   73 

45.  Results  of  this  law  75 

46.  Relative  amount  of  the  three  factors:     Law  of  diminishing 

returns 77 

47.^Some  results  of  this  law 78 

48.  Organization  of  markets   79 

CHAPTER  VI.  PROBLEMS  OF  PRODUCTION. 

49.  Introduction   82 

50.  Forest    preservation    82 

51.  Floods 84 

52.  Waterways 85 

53.  Good    roads    88 

54.  Irrigation    90 

55.  Swamp    lands    92 

56.  Scientific    farming: 93 

57.  Government  agencies  for  studying  agriculture   95 

58.  Lines   of  investigation    97 

59.  Child   labor 100 

60.  Industrial   education    103 

CHAPTER    VII.      MONOPOLIES. 

61.  Definition   of  monopoly    105 

62.  Classes  of  monopolies 105 

63.  Forms  of  combination   106 

64.  Municipal  monopolies    110 

65.  Manufacturing    monopolies     112 

66.  Evils   of   monopolies    114 

67.  Sherman  anti-trust  law  of  1890    115 

68.  Recent   anti-trust   legislation    117 

69.  Monopoly   value    118 

CHAPTER  VIII.     RAILROADS. 

70.  Importance   of   railroads    119 

71.  A  natural  monopoly    120 

72.  Railway  development  to  1850   122 

73.  Development  of  competing  systems — 1850-1870    122 

74.  Pools,  1870-1887   123 

75.  Rate-making    124 

76.  Interstate  commerce  act  of  1887   126 

77.  Results  of  the  act   128 

78.  Recent   legislation    128 

79.  The  present  situation   130 

:80.  Public  ownership    132 


III 

CHAPTER  IX.     VALUE. 

81.  Introduction    134 

82.  Advantages  of  exchange    134 

83.  Market  value  and  normal  value 135 

84.  Competition    136 

85.  Demand   and   supply    137 

S6.  Cost   of   production    139 

CHAPTER  X.  MONEY  AND  CREDIT. 

87.  Functions   of  money    141 

88.  Characteristics  needed  in  good  money  142 

89.  Materials  needed  for  money   143 

^0.  Credit   currency    144 

91.  Changes  in  value  of  money.     Price  tables   147 

92.  Causes  of  changes  in  value  of  money  148 

93.  Effects  of  credit  on  prices   151 

94.  Law  of  value  of  money   152 

95.  Changes  in  prices  since  1870   153 

96.  Territorial  distribution  of  gold    155 

97.  Gresham's   law    156 

CHAPTER  XL  PROBLEMS  OF  MONEY  AND  BANKING. 

98.  The  three  problems   158 

99.  The   standard    159 

100.  The  commodity  standard   160 

101.  Bimetallism    161 

102.  Government  paper   .    163 

103.  Functions  of  banks    164 

104.  Needed    characteristics    of   banks    166 

105.  Defects  in  our  system  previous  to  1913 169 

106.  The  Federal  Reserve  act  of  1913 170 

107.  Service    172 

108.  Safety    173 

109.  Elasticity  of  credit   174 

CHAPTER  XII.    INTERNATIONAL  TRADE. 

110.  The  long  controversy    177 

111.  Advantages  of  international  trade   178 

112.  Economic  effects  of  protective  tariffs   179 

113.  The  young  industries  argument   182 

114.  The  tariff  and  wages   183 

115.  Other  arguments    183 

116.  The  present  tariff   184 

CHAPTER  XIII.     WAGES. 

117.  Distribution    185 

118.  Annual  income  and  annual  product 185 

119.  Money  wages  and  real  wages  186 


IV 

120.  Demand  for  labor    186 

121.  The  supply  of  labor    188 

122.  The   standard   of  living    190 

123.  Productivity    191 

CHAPTER  XIV.     RENT. 

124.  Nature  of  rent    194 

125.  Urban    rents    195 

126.  Rent  not  a  cause  of  high  prices 196 

127.  Rent  an  unearned  income 196 

128.  Rent  and  the  increase  of  population   197 

129.  The  single  tax    198 

CHAPTER  XV.    INTEREST. 

130.  Nature  of  interest  200 

131.  Theories  of  interest 200 

132.  Demand   and  supply 201 

133.  Productivity    202 

134.  Long-  and  short-time  loans   204 

135.  The  justification  of  interest   205 

CHAPTER  XVI.     PROFITS. 

136.  Nature  of  profits 207 

137.  A  residual   share    207 

138.  No  uniform   rate    208 

139.  Profits   and   interest    209 

140.  Profits  and  wages   210 

141.  Distribution  and  social  progress   211 

CHAPTER  XVII.     LABOR  PROBLEMS. 

142.  Origin   of  labor  problems    — 213 

143.  Forms  of  labor  organizations 215 

144.  Objects  of  trade  unions   217 

145.  Means  of  securing  demands — Monopoly 217 

146.  Joint  agreements   218 

147.  The  closed  shop    219 

148.  Strikes    220 

149.  Limitation  of  output   221 

150.  Compulsory   arbitration    223 

151.  Profit-sharing    224 

152.  Cooperation    225 

153.  Labor  legislation    226 

CHAPTER  XVII.     SOCIALISM. 

154.  Socialism  defined   229 

155.  Origin  and  growth  229 

156.  Charges   against  capitalisni    230 

157.  Criticisms   231 

158.  Socialist    production    232 

159.  Socialist  distribution   234  ^ 


ELEMENTS  OF  ECONOMICS 

CHAPTER  I. 
Outlines  of  Economic  History. 

1.  SCOPE  OF  ECONOMICS.  Economics,  or  Political  Economy, 
is  the  science  which  treats  of  men's  efforts  to  get  a  living.  It  is^  one 
of  a  new  group  of  sciences  called  the  social  sciences.  Man  had 
not  yet  emerged  from  barbarism  when  he  began  to  make  a  more  or 
less  systematic  study  of  the  facts  and  forces  of  nature,  and  the  crude 
elements  of  some  of  the  sciences  of  nature  and  of  mathematics  began 
to  develop.  The  facts  and  forces  involved  are  so  vast  and  their  secret 
workings  lie  so  deeply  buried  that  the  natural  sciences  are  not  yet 
complete;  but  considerable  progress  along  these  lines  had  been  made 
before  man  began  a  systematic  study  of  his  own  social  activities.  The 
Greek  philosopher,  Aristotle,  made  a  careful  study  of  the  governments 
of  his  time,  and  his  book  on  politics  contains  many  sensible  con- 
clusions on  the  general  principles  of  government.  But  his  work  was 
fragmentary,  and  very  little  more  was  done  towards  working  out  the 
science  of  government  during  the  next  twenty-two  centuries.  Not 
until  the  nineteenth  century  did  any  systematic  work  on  government 
appear  worthy  of  the  name  of  a  scientific  book.  And  the  science  of 
economics  is  equally  new.  The  first  great  work  upon  the  subject. 
Adam  Smith's  Wealth  of  Nations,  appeared  in  1776.  But  it  was  quite 
crude,  and  not  till  well  into  the  nineteenth  century  did  the  subject 
begin  to  assume  a  real  scientific  shape. 

During  the  last  half  century  great  thinkers  have  turned  their 
attention  to  man's  social  activities,  and  several  social  sciences  have 
been  roughly  worked  out.  There  are  six  great  social  institutions 
around  which  man's  activities  center,  •  the  home,  the  church,  the 
school,  the  club,  the  state,  and  business.  Each  of  these  is  an  institu- 
tion, since  it  is  organized,  each  having  its  own  peculiar  organization. 
In  the  home  are  the  father,  the  mother  and  the  children,  each  having 
their  duties  to  perform  and  all  working  towards  the  common  happiness 


ELEMENTS  OF  ECONOMICS 


and  development  of  all.  The  church  is  likewise  organized,  and  has- 
its  special  function  to  perform.  Each  of  these  institutions,  its  organ- 
ization, its  functions,  and  the  principles  that  should  guide  men  in 
their  associated  efforts  in  each  of  the  institutions,  would  constitute 
a  social  science.  History  is  son(etimes  classed  as  a  social  science, 
but  it  may  be  doubted  that  history  can  be  called  a  science.  There  are 
indeed  many  great  principles  which  history  teaches,  but  they  would 
be  included  in  some  one  or  more  of  the  definite  social  sciences.  His- 
tory is  rather  the  tracing  of  man's  activities  along  all  lines  of  effort,, 
including  the  six  named  above,  together  with  the  grovd;h  of  language, 
literature  and  art,  and  man's  mastery  over  the  secrets  of  nature.  The 
range  of  subjects  is  too  vast  and  our  knowledge  of  the  field  as  a  whole 
too  limited  to  enable  us  to  treat  history  as  a  science,  which  is  a  body 
of  laws.  But  it  is  a  social  study.  Men  are  attempting  to  study  man's 
general  social  activities  as  a  whole  and  reduce  them  to  a  scientific 
treatment,  and  the  name  of  this  newest  of  the  social  sciences  is  So- 
ciology. But  as  yet  the  vastness  and  indefiniteness  of  the  subject  has 
prevented  the  formulation  of  any  very  definite  science  of  man's  social 
activities  in  general. 

Of  the  six  institutions  named  above,  the  two  that  are  now  studied 
most,  both  in  school  and  out  of  it,  are  the  state  and  business.  In  the 
study  of  the  state,  which  is  man's  political  organization  for  the  pur- 
pose of  government,  the  school  is  usually  included,  since  the  schools- 
are  under  public  management  and  the  political  organization  controls 
the  schools  in  a  general  way.  The  study  of  business  from  the  broad 
viewpoint  of  social  activity,  is  the  study  of  economics.  At  first  sight 
the  two  subjects,  civics,  or  the  study  of  government,  and  the  study  of 
economics  may  seem  entirely  distinct  and  separate.  But  as  a  matter 
of  fact  the  two  run  together  at  several  points,  and  our  school  texts  on 
the  two  subjects  overlap  considerably.  This  causes  unnecessary  du- 
plication and  should  be  avoided  if  possible.  The  study  of  the  structure 
and  workings  of  government  are  sufficiently  distinct  from  man's  activ- 
ity in  gaining  a  living,  so  that  no  trouble  arises  under  those  two  groups 


ELEMENTS   OF   ECONOMICS 


of  topics.  But  as  soon  as  we  begin  to  consider  what  the  government 
is  doing  to  benefit  the  people  in  their  efforts  to  gain  a  living  we  are 
led  over  into  the  field  of  economics.  Such  subjects  as  govern- 
ment control  of  monopolies  and  of  railroads,  minimum  wage  boards, 
and  numerous  other  topics  often  treated  in  our  text-books  on  civics, 
are  parts  of  political  economy,  and  cannot  be  understood  until  the  prin- 
ciples of  that  science  are  understood,  and  should,  therefore,  be  treated 
in  economics  rather  than  in  civics.  In  the  selection  of  topics  from 
this  border  land  of  uncertainty,  the  author  has  been  guided  by  the 
following  principle:  If  the  activity  of  the  government  along  any  line 
affects  vitally  man's  efforts  to  gain  a  living,  and  a  knowledge  of  the 
subject  involves  the  principles  of  economics,  the  topic  is  included  in 
the  science  of  economics. 

As  society  is  at  present  organized  in  its  efforts  to  gain  a  living, 
the  principles  of  the  science  naturally  fall  into  four  groups,  known  as 
Consumption,  Production,  Exchange,  and  Distribution.  Man  craves 
certain  things  which  satisfy  his  economic  wants,  and  his  action, 
prompted  by  this  longing,  can  be  reduced  to  certain  laws,  known  as 
laws  of  consumption.  To  satisfy  these  wants,  goods  are  produced, 
and  the  success  of  our  efforts  in  this  direction  depends  upon  certain 
conditions,  which  may  be  reduced  to  laws  of  production.  And  since 
each  man  produces  by  himself  only  a  few  things  that  he  wants,  or 
maybe  none  at  all,  he  must  sell  what  he  produces  and  buy  what  he 
wants;  and  this  ii^olves  the  laws  of  Exchange,  or  of  Value.  And 
since  some  of  the  people  in  our  industrial  society  own  the  land,  some 
own  capital,  and  some  own  neither,  and  are  therefore  compelled  to 
work  for  others  for  a  living,  a  fourth  group  of  topics  arises  called  Dis- 
tribution, which  treats  of  the  laws  of  wages,  of  interest,  of  rent  and 
of  profits .  That  is,  society  is  now  divided  into  four  industrial  classes, 
which  overlap  somewhat,  land  owners,  owners  of  capital  who  do  not 
themselves  use  it  but  loan  it  at  interest,  wage  earners,  and  the  busi- 
ness manager  who  organizes  the  land,  labor  and  capital  and  sets  them 
to  work. 


ELEMENTS   OF   ECONOMICS 


2.  IMPORTANCE  OF  THE  STUDY  OF  ECONOMICS.  From 
the  nature  of  economics  it  is  apparent  that  the  importance  of  study- 
ing it  can  hardly  be  overestimated.  The  securing  of  wealth  is  nec- 
essary to  enable  men  to  pursue  successfully  their  vocation,  to  enable 
them  to  perform  with  satisfaction  their  activities  in  the  higher  walks 
of  life.  To  secure  wealth  most  readily,  the  principles  of  production 
must  be  followed;  and  to  ensure  that  all  classes  participate  in  the  ma- 
terial prosperity  of  the  nation  and  thus  have  a  chance  to  enjoy  the 
higher  things  of  life,  there  must  prevail  just  principles  of  distribu- 
tion .  But  this  ideal  condition  does  not  prevail .  There  is  much  dis-  . 
content  in  the  world  growing  out  of  what  many  believe  to  be  unjust 
conditions,  and  we  have  a  vast  number  of  problems  demanding  solu- 
tion. Such  problems  as  the  control  of  monopolies,  the  settling  of 
labor  troubles,  securing  a  living  wage  for  the  lower  classes  of  labor- 
ers, improving  the  so-called  "homes'*  of  our  "slum"  districts,  these 
and  many  other  problems  loom  up  before  us  and  demand  solution^ 
and  if  they  are  not  solved,  and  solved  justly,  our  Republic  is  doomed. 
And  who  are  going  to  solve  these  problems?  The  people.  And 
if  the  people  do  not  understand  these  economic  problems,  how  can 
they  solve  them  intelligently?  Every  citizen  of  the  land  should  un- 
derstand the  essentials  of  economics,  if  he  or  she  would  not  be  a  mere 
cipher  in  the  great  social  work  of  lending  a  helping  hand,  and  lending 
it  intelligently.  Our  government  must  take  hold  of  many  of  these 
problems,  and  in  a  republic  the  people  must  contijol  the  governments 
and  decide  how  these  problems  shall  be  solved. 

3.  THE  INDUSTRIAL  EVOLUTION  OF  SOCIETY.  The  pres- 
ent organization  of  industrial  society  will  be  better  understood  if  we 
approach  it  from  the  historical  point  of  view  and  trace  briefly  the 
great  changes  that  have  come  about  since  those  primitive  days  when 
men  were  savages.  In  this  chapter,  therefore,  we  shall  give  a  brief 
sketch  of  man's  industrial  development  in  general  and  of  the  special 
development  of  the  United  States. 

Man  is  a  reasoning  being  and  he  therefore  tries  to  increase  his 


ELEMENTS   OF   ECONOMICS 


enjoyment  by  improving  his  surroundings  and  to  lighten  his  work  by 
doing  things  in  better  ways.  Hence,  man  alone  of  all  the  animal 
creation  progresses.  In  his  progress  in  ways  of  gaining  a  living 
we  can  see  five  fairly  distinct  stages.  The  first  was  the  hunting  and 
fishing  stage,  when  men  got  their  living  by  hunting  for  roots,  herbs 
and  animals,  and  by  catching  fish  from  the  streams  and  lakes.  The 
second  was  the  pastoral  stage,  -when  man  had  domesticated  some  of 
the  animals,  and  roamed  around  with  them  in  search  of  food  for  them. 
The  next  was  the  agricultural  stage  in  which  men  learned  to  culti- 
vate the  soil  and  raise  food  for  themselves  and  their  sheep,  cattle 
and  other  animals.  In  this  age  man  first  had  a  fixed  abode.  Then 
in  the  fourth  stage,  called  the  handicraft  stage,  men  began  to  special- 
ize in  their  work,  and  division  of  occupations  resulted.  Some  con- 
tinued to  be  farmers,  but  they  no  longer  made  all  things  they  used, 
as  in  the  previous  stages;  instead,  the  shoemaker,  the  carpenter,  the 
blacksmith,  the  cabinet  maker,  the  cloth  maker  and  numerous  others 
supplied  society  with  goods  other  than  agricultural  products.  Fin- 
ally man  become  more  inventive  and  the  age  of  machinery  and  the 
great  factory  was  ushered  in. 

There  were  causes  for  this  development  in  this  particular  order. 
In  each  succeeding  age  man  gained  greater  power  over  his  own  hap- 
piness. In  the  hunting  and  fishing  stage  man's  living  was  uncertain. 
When  he  started  out  on  a  hunt  he  was  not  sure  of  finding  anything. 
By  some  means,  we  know  not  how,  man  began  to  domesticate  certain 
animals,  and  his  living  was  more  secure,  for  less  depended  on  chance 
and  more  on  his  own  planning.  Then  when  he  tilled  the  ground  as 
well  as  kept  his  flocks  and  herds,  his  living  was  still  more  secure,  for 
now  nature  was  assisted  in  her  efforts  to  produce  the  fruits  of  the 
earth.  But  he  was  as  yet  jack-of -all-trades  and  master  of  none,  and 
life  was  crude  at  best.  Then  some  with  special  liking  for  particular 
lines  of  work  began  to  specialize,  and  each  man  could  do  better  work 
and  more  of  it,  because  he  gained  in  skill  by  often  repeating  the  same 
processes.    As  yet,  however,  man  was  trying  to  cope  with  nature  with 


8  ELEMENTS  OF  ECONOMICS 

very  simple  tools  run  by  hand  power;  then  with  vast  and  complicated 
machinery  run  by  steam,  water-power  or  electricity,  man  greatly  in- 
creased his  productive  powers,  and  he  had  more  time  and  means  to 
satisfy  the  longings  of  his  intellectual  and  spiritual  nature.  Thus 
each  age  had  its  advantages  over  preceding  ages. 

The  time  of  each  of  these  five  stages  of  progress  is  not  definitely 
known,  and  was  not  the  same  in  different  parts  of  the  world .  In  parts 
of  South  America  and  in  Africa  the  natives  are  yet  in  the  first  stage, 
and  some  few  tribes  indeed  are  in  a  stage  that  apparently  preceded 
the  hunting  and  fishing  stage,  when  men  had  not  advanced  sufficiently 
beyond  the  brute  creatures  to  be  able  to  kill  them  for  food,  but  relied 
on  roots  and  herbs.  Following  the  develpoment  in  the  portions  of  the 
world  that  first  advanced,  the  time  of  each  stage  was  roughly  as  fol- 
lows. The  first  stretches  far  back  into  an  unknown  past  and  the  time 
of  its  ending  we  do  not  know.  When  we  catch  our  first  glimpses  of 
the  progressive  portions  of  the  world  some  six  or  seven  thousand 
years  ago,  in  the  Valley  of  the  Nile  and  in  the  Tigres-Euphrates  Val- 
ley, they  were  well  into  the  agricultural  stage,  while  the  Asiatic 
tribes  around  them  were  in  the  pastoral  stage,  and  Europe,  except 
bits  of  Greece,  was  in  the  hunting  and  fishing  stage.  Roughly 
speaking,  the  handicraft  stage  covers  the  period  from  the  dawn  of 
history  (about  5000  B.  C.  in  Egypt  and  Chaldea)  till  near  the  close 
of  the  eighteenth  century,  or  a  period  of  nearly  7000  years.  Only  a 
small  portion  of  recorded  history,  therefore,  lies  outside  the  fourth 
stage  of  man^s  development.  After  the  fall  of  the  Western  Roman  Em- 
pire in  476  A.D.,  the  western  portion  of  Europe,  that  is,  all  west  of  the 
Greek  or  Byzantine  Empire,  was  thrust  backward  for  some  five  or  six 
hundred  years,  the  handicrafts  declined  and  man  was  nearly  in  the  ag- 
ricultural stage,  for  most  people  made  nearly  all  the  things  they  used, 
including  tools  and  clothing.  The  handicrafts  did  not  wholly  die  out 
in  Western  Europe,  and  remained  in  a  crude  state,  ready  to  develop 
at  the  first  opportunity,  when  the  barons  and  knights  became  less  tur- 
bulent and  began  to  respect  the  rights  of  commerce  to  some  extent. 


ELEMENTS   OF   ECONOMICS 


4.  THE  FIRST  TWO  STAGES.  The  first  two  stages  had  several 
common  characteristics  and  may  be  treated  together.  It  was  the  long, 
dark  night  before  the  dawn.  Man  had  no  fixed  abode  and  consequent- 
ly progress  was  exceedingly  slow  and  could  not  pass  beyond  the  point 
of  satisfying  physical  wants,  first,  because  it  took  so  much  time  to 
satisfy  these  wants  with  the  crude  means  at  hand,  and,  secondly,  the 
desire  for  culture  could  not  be  satisfied,  even  if  it  could  spring  up, 
while  men  were  roving  around.  Schools  and  books  and  authors  can- 
not exist  in  that  sort  of  a  society.  Much  progress  was  indeed  made 
during  this  long  period,  how  long  we  do  not  know.  A  number  of  tools 
were  invented,  including  the  bow  and  arrow,  fish  hooks  and  lines,  the 
;stone  ax,  the  rude  bark  canoe;  and  the  art  of  striking  a  fire  by  fric- 
tion had  been  learned,  so  that  food  could  be  cooked  and  the  rude  hut 
•or  tent  warmed.  When  animals  were  domesticated  a  long  stride  for- 
ward was  taken.  To  make  this  progress  took  thousands  of  years. 
These  two  stages  roughly  correspond  to  the  Old  Stone  Age  and  the 
first  part  of  the  New  Stone,  or  Polished  Stone  Age. 

Each  family  was  an  independent  industrial  unit,  supplying  all 
its  wants  by  the  products  of  its  own  labor,  the  only  division  of  labor 
being  that  within  the  family.  For  this  reason  there  was  practically 
no  exchanging  of  goods,  except  now  and  then  two  individuals  might 
barter  a  little,  much  as  boys  now  trade  pocket  knives.  But  such  bar- 
ter would  have  little  more  importance  to  society  than  the  bartering 
of  trinkets  among  the  boys  today.  Class  distinctions  came  in  during 
the  pastoral  stage,  enemies  captured  in  battle  being  enslaved,  since 
they  could  be  put  to  work  tending  the  flocks  and  herds.  But  the 
slaves  were  not  numerous  and  slavery  played  a  small  part  in  in- 
dustry. 

5.  THE  AGRICULTURAL  STAGE.  The  agricultural  stage  was 
the  dawn  before  the  break  of  day.  With  a  fixed  habitation  much  pro- 
gress could  be  made  in  a  shorter  time.  Now  rude  huts  or  temporary 
tents  naturally  gave  place  to  substantial  dwellings,  taking  on  more  and 
more  of  the  idea  of  architectural  beauty.     Buildings  now  satisfied 


10  ELEMENTS   OF   ECONOMICS 

something  more  than  physical  wants,  and  men  began  to  gather 
around  them  many  material  things  that  ministered  in  some  degree  to 
the  higher  tastes. 

As  yet  the  family  was  in  the  main  independent,  though  a  few 
trades  sprang  up  quite  early  in  the  period,  and  they  continued  to  mul- 
tiply until  the  agricultural  stage  passed  imperceptably  into  the  handi- 
craft stage.  Until  well  towards  the  close  of  the  period  there  was  lit- 
tle trade  and  that  was  by  barter.  Now  for  the  first  time  men  gained 
their  living  by  hard  and  constant  toil.  Hunting  and  fishing  were  not 
very  hard  work  and  it  was  intermittent.  Tending  flocks  and  herds 
is  hardly  work  at  all.  But  tilling  the  soil  is  work,  and  the  strong 
naturally  imposed  the  burden  on  the  weak,  and  slavery  became  a 
prominent  institution,  and  society  became  divided  into  two  classes, 
landlords  and  slaves.  There  were  but  a  few  hired  laborers  and  there 
were,  therefore,  no  labor  problems  to  solve.  Near  the  end  of  the  pe- 
riod the  Age  of  Metals  began.  The  first  metal  used  for  tools  was 
copper.  This  is  a  soft  metal  and  was  no  great  improvement  over  pol- 
ished stone,  but  it  was  some  better,  and  would  take  a  finer  edge.  As 
yet  people  were  crude  and  ignorant,  on  the  whole,  though  the  elements 
of  learning  were  developing  among  the  leisure  classes,  and  rude  be- 
ginnings were  made  in  the  development  of  the  art  of  representing 
ideas  by  pictures  or  symbols. 

6.  THE  HANDICRAFT  STAGE.  The  next  great  stage,  which 
covers  mi^st  of  man's  recorded  history,  is  called  the  handicraft  stage, 
though  a  better  name  would  be  the  Age  of  Division  of  Occupations, 
since  that  is  the  distinguishing  feature  of  the  age.  With  division  of 
occupations  men  were  no  longer  jacks-of-all-trades,  and  by  concen- 
trating their  energies  on  one  occupation  became  more  skillful,  and 
forms  of  material  wealth  other  than  lands  began  to  accumulate.  Men 
were  no  longer  independent  of  their  fellow  men,  but  were  dependent 
on  others  for  most  of  the  things  needed.  Life  was  now  more  complex, 
and  social  relations  became  of  more  importance.  Since  men  must  dis- 
pose of  their  goods,  and  obtain  many  kinds  of  goods  in  return,  ex- 


ELEMENTS   OF   ECONOMICS  11 

change  became  an  important  phase  of  social  relations.  Barter  would 
no  longer  suffice  and  money  came  into  use  to  facilitate  exchanges. 

With  division  of  occupations  great  changes  came  about  in  the  in- 
dustrial classes.  Between  the  great  landlords  on  the  one  side  and 
slaves  on  the  other,  there  grew  up  a  great  free  industrial  class.  This 
industrial  class  consisted  of  hired  laborers,  small  handicraftsmen  and 
merchants.  Problems  of  distribution  became  important  and  strikes 
began  to  trouble  the  industrial  world.  During  this  period,  however, 
labor  troubles  were  not  serious,  since  most  of  the  laborers  in  the 
skilled  trades  hoped  some  day^  to  become  employers  of  labor  and 
hence  they  would  not  be  very  anxious  to  build  up  a  strong  labor  or- 
ganization which  would  antagonize  their  interests  in  later  life. 

The  development  of  the  trades  and  of  commerce  was  parallel  with 
the  growth  of  cities  and  of  city  life.  Real  culture  sprang  up  and 
great  seats  of  learning  flourished.  In  this  period  the  mind  first  re- 
ceived special  training  and  great  differences  in  the  intellectual  power 
of  men  resulted.  In  the  agricultural  stage  the  great  landlords  were 
indeed  intellectually  superior  to  their  slaves;  but  differences  in  in- 
tellectual power  were  small  as  compared  with  later  times.  Great 
minds  began  to  grapple  with  the  mysteries  of  nature,  and  the  prob- 
lems of  life  and  of  science  and  literature  were  born. 

This  growth  of  cities  and  of  a  great  free  industrial  class,  to- 
gether with  other  forces,  changed  labor  conditions  in  the  rural  dis- 
tricts. Slavery  gradually  changed  into  serfdom  and  the  serf  in  time 
became  free.  Thus  numerous  classes  took  the  place  of  the  two  great 
classes  of  the  agricultural  period.  The  noble  still  existed,  but  beside 
him  arose  the  priests  and  the  men  of  learning  who  guarded  the  re- 
ligious and  intellectual  interest  of  the  race.  The  priest  and  the  men 
of  learning  were  often  the  same,  but  in  some  countries  they  were 
different;  that  is,  a  learned  class  arose  who  were  not  of  the  priest- 
hood. Beneath  these  two  powerful  classes,  the  nobles  and  the  learned, 
including  the  priesthood,  were  the  merchants,  who  often  rivalled  the 
men  of  the  other  two  classes  in  wealth  and  power.     Then  came  the 


12  ELEMENTS   OF   ECONOMICS 

artisans,  who  were  skilled  laborers,  and  lastly  the  unskilled  laborers 
in  cities;  in  the  country  small  farmers  and  hired  laborers  corres- 
ponded roughly  to  the  two  lower  groups  in  the  city. 

In  this  age  came  great  changes  in  tools.  The  soft  copper  was 
replaced  by  the  much  harder  bronze  near  the  beginning  of  the  handi- 
craft stage,  or  about  4500  B.  C,  and  for  three  thousand  years  was 
the  chief  metal  used  for  making  tools  and  edged  instruments.  About 
1500  B.  C.  iron  came  into  use.  Many  small  contrivances  were  invented 
to  increase  men's  power  over  nature,  such  as  the  spinning  wheel  and 
the  loom,  the  rude  plow,  the  hoe,  the  sickle,  carpenters'  tools,  the 
crowbar,  and  the  pulley. 

7.  THE  FACTORY  STAGE.  The  transition  from  the  handicraft, 
hand-tool  using  age  to  the  factory  stage  was  so  sudden  that  it  has 
been  called  the  Industrial  Revolution.  It  did  not  at  once  affect  all 
handicrafts,  or  indeed  the  majority  of  them,  but  it  affected  a  few 
trades  which  at  that  time  were  vastly  more  important  than  any 
others,  considering  the  number  of  people  employed.  The  trades  first 
affected  were  the  clothmaking  and  allied  trades.  It  began  in  England 
in  the  last  half  of  the  eighteenth  century  with  the  invention  of  Har- 
^ave's  spinning  jenny  (1767),  Cartwright's  power  loom  (1785)  and 
Watt's  steam  engine  (1785).  The  age  of  machinery  and  the  factory 
gathered  the  laborers  together  in  larger  groups.  During  the  handi- 
craft stage  the  business  unit  was  small,  something  like  our  familiar 
cobblers'  shops  of  today,  with  from  one  to  half  a  dozen  workers,  in- 
cluding the  master  craftsman,  who  worked  with  his  journeymen  and 
apprentices  and  shared  with  them  the  hardships  and  the  pleasures  of 
the  business. 

But  the  Industrial  Revolution  put  a  great  gulf  between  employer 
and  employed,  for  the  day  laborer  could  little  hope  to  become  a  capi- 
talist employer,  because  of  the  great  cost  of  a  factory.  Thrust  from 
the  little  shop,  with  its  light  and  its  wholesome  air  and  its  easy-going 
pace,  into  the  great  factory  with  its  foul  air  and  its  whir  of  machin- 
ery, men  lost  control  over  their  actions  and  surroundings  and  became 


ELEMENTS   OF   ECONOMICS  13 

part  of  a  great  machine  which  set  a  rapid  pace  for  work.  Small 
craftsmen,  master-craftsmen  and  all,  sank  into  the  ranks  of  hired 
laborers,  and  a  few  energetic  and  able  leaders  became  the  employing 
class,  and  from  the  profits  of  large  capital  became  immensely 
rich.  Here  indeed  were  materials  for  discontent  among  the  laboring 
classes;  thus  the  Industrial  Revolution  ushered  in  the  age  of  indus- 
trial warfare  between  labor  and  capital.  Social  problems  multiplied^ 
child  labor,  starvation  wages,  the  "slums,"  and  hosts  of  others  came 
crowding  in  upon  the  world.  As  if  these  evils  were  not  enough  to 
vex  society,  the  business  unit  grew  in  size  until  monopoly  in  its 
various  forms  threatens  to  draw  into  the  hands  of  a  small  portion  of 
the  capitalistic  class  most  of  the  wealth  of  the  world  and  leave  the 
vast  majority  of  mankind  but  a  very  small  part  of  the  advantage 
gained  from  all  the  labor  saving  machinery  that  has  been  multiply- 
ing since  the  Industrial  Revolution  began. 

8.  INDUSTRIAL  DEVELOPMENT  IN  U.  S.  COLONIAL  PE- 
RIOD TO  1815.  When  America  was  settled,  Europe  was  in  the 
handicraft  stage,  but  conditions  in  the  New  World  caused  industry 
to  revert  to  an  earlier  stage,  to  a  condition  similar  to  that  in  the 
transitional  period  between  the  agricultural  stage  and  the  handicraft 
stage.  Most  of  the  articles  used  by  the  colonists  were  made  by  the 
family,  the  wives  making  the  clothing  and  the  men  making  the  fur- 
niture for  the  house  and  the  tools  for  the  farm,  with  the  exception 
of  a  few  iron  tools  requiring  great  skill,  which  were  imported  from 
England  or  made  in  the  colonies  by  handicraftsmen.  There  were 
a  few  trades,  such  as  carpentering,  blacksmithing,  shipbuilding,  hat- 
making  and  a  few  others,  but  the  numbers  engaged  in  them  were 
small .  The  great  body  of  the  people  were  engaged  in  agriculture,  and 
there  were  no  great  labor  problems. 

The  causes  of  this  reversal  to  an  earlier  stage  of  development 
were  mainly  four.  (1)  The  cost  of  transportation  made  it  cheaper  to 
produce  in  America  all  except  those  things  requiring  superior  work- 
manship, such  as  edged  tools  and  articles  of  luxury  used  by  the  rich, 


14  ELEMENTS   OF   ECONOMICS 

including  fine  clothing  and  furniture.  (2)  The  intelligence  and  thrift 
of  the  housewife  enabled  her  to  compete  with  the  clothmaking  trades, 
in  making  the  coarser  garments,  since  she  could  use  the  same  kinds 
of  tools  as  those  used  by  the  handicraftsmen;  and  if  she  could  not 
work  quite  so  rapidly  as  they  it  was  a  by-industry  with  her.  (3) 
Another  cause  which  probably  hindered  the  development  of  the 
handicrafts  to  some  extent  was  the  British  policy  of  restricting  trade 
and  industry.  But  the  importance  of  such  restrictions  is  a  matter  of 
dispute  among  historians,  some  considering  it  a  very  important  cause 
for  the  non-development  of  handicrafts  in  the  colonies,  especially  of  . 
those  making  expensive  articles  requiring  a  high  degree  of  skill  in 
which  there  would  be  no  competition  with  the  farmers  and  their 
wives.  Other  historians  think  that  British  restrictions  had  little  to 
do  with  it,  and  they  attribute  the  meager  development  of  the  trades 
to  natural  conditions  in  America.  (4)  The  chief  condition  hindering 
such  development  was  the  presence  of  an  abundance  of  cheap  land. 
Benjamin  Franklin,  whose  judgment  is  certainly  worth  considering, 
thought  that  cheap  land  was  the  main  thing  that  prevented  the  de- 
velopment of  the  skilled  trades.  When  young  men  could  become 
farmers  and  their  own  masters  at  little  trouble  and  expense,  they 
would  not  care  to  spend  several  years  learning  a  trade  and  then  work 
for  someone  until  they  could  set  up  for  themselves. 

The  Revolution  did  not  materially  change  the  conditions  of  things 
in  America.  A  few  industries  started  up  under  the  stimulus  offered 
by  some  of  the  states  in  the  way  of  advertising  in  Europe  for  skilled 
workmen  to  help  start  the  new  machinery  that  the  Industrial  Revolu- 
tion had  produced  in  England,  and  by  the  offer  of  various  rewards  for 
setting  up  factories.  But  these  efforts  did  not  amount  to  much  until 
after  the  embargo  policy  and  the  war  of  1812  had  afforded  special  in- 
ducements to  capital  to  go  into  the  manufacturing  business. 

9.  DEVELOPMENT  FROM  1815  TO  1861.  The  special  induce- 
ment which  attracted  capital  into  manufac curing  was  the  rise  in  prices 
caused  by  the  decline  in  imports,  which  resulted  from  the  embargo 


ELEMENTS   OF   ECONOMICS  15 

policy  and  the  war  of  1812.  At  the  .close  of  that  war  imports  began 
to  flood  the  country  and  manufacturers  clamored  for  and  obtained 
the  protective  tariff  of  1816.  From  that  time  on  to  the  Civil  War 
manufacturing  constantly  increased  in  relative  importance,  though 
as  yet  it  was  of  secondary  importance  as  compared  with  agriculture. 
Besides  the  protective  tariff  there  were  several  other  causes  for 
the  growth  of  manufacturing,  and  these  causes  would  have  developed 
manufacturing  in  time  without  any  tariff,  though  not  so  soon.  Land 
was  no  longer  cheap  in  the  older  portions  of  the  country  and  a  land- 
less population  was  growing,  not  all  the  surplus  being  attracted 
across  the  mountains  to  the  Far  West  of  that  day.  Hence,  labor  was 
to  be  had  in  increasing  abundance,  and  to  become  a  laborer  in  the 
factories  required  no  long  apprenticeship,  as  in  the  old  handicraft 
trades.  A  third  cause  was  the  westward  expansion  of  population  into 
the  regions  of  the  West  abundantly  supplied  with  coal  and  iron  and 
other  mineral  resources  needed  in  the  factory  stage  of  development; 
and  a  fourth  cause,  which  went  hand  in  hand  with  these  other  causes, 
was  the  improvement  in  transportation,  especially  the  railroad,  which 
came  in  during  the  last  half  of  the  period.  All  these  factors  made 
manufacturing  as  profitable  as  farming,  and  capital  naturally  flowed 
into  this  new  field. 

This  meant  that  the  simple  life  of  the  colonial  days  must  pass 
away.  A  large  labor  class  was  developing,  cities  were  growing,  and 
more  push  and  energy  characterized  American  enterprise,  especially 
in  the  North,  where  the  curse  of  slavery  did  not  cast  its  baleful 
shadow  over  every  phase  of  human  activity,  physical,  mental  and 
moral.  Trade  unions  began  to  be  formed;  but  they  were  weak  and 
ineffective,  and  though  there  were  strikes  occasionally,  they  did  not 
on  the  whole  seriously  disturb  the  industrial  world.  There  was  as 
yet  free  land  in  the  West  and  the  discontented  and  the  adventurous 
were  joining  the  westward  flowing  stream  of  humanity.  Thus  the 
surplus  in  the  labor  market  found  a  vent  and  did  not  become  seriously 
large;  and  as  a  consequence  wages  were  fairly  good.     At  least  they 


16  ELEMENTS   OF   ECONOMICS 

satisfied  the  less  ambitious  and  adventurous  ones  who  staid  at  home. 

10.  DEVELOPMENTS  SINCE  1861.  The  last  half  century  of 
our  industrial  history  has  witnessed  four  well  marked  developments, 
(1)  the  rise  of  manufacturing  to  a  scale  which  placed  that  group 
about  on  a  level  with  agriculture  in  importance,  (2)  the  growth  of 
monopolies,  including  railroads,  (3)  the  growth  of  trade  unions,  and 
(4)  the  appearance  of  the  numerous  evils  connected  with  the  lower 
classes  of  unskilled  workers,  such  as  child  labor,  sweatshops,  over- 
crowding in  the  great  cities,  the  latter  producing  a  whole  crop  of 
"slum"  problems. 

Among  the  causes  for  this  great  growth  of  manufacturing  five 
were  of  special  importance.  (1)  The  Civil  War  caused  an  increase  in 
tariff  rates  and  from  1861  to  the  passage  of  the  Underwood  tariff  in 
1913  the  protective  rates  were  from  two  to  three  times  as  high  as  in 
the  previous  period,  and  this  high  rate  invited  capital  into  new  lines 
of  enterprise.  But  the  great  natural  causes  were  at  work.  (2)  The 
accumulation  of  capital  in  the  old  lines  of  business  would  naturally 
cause  it  to  seek  new  fields;  (3)  new  and  rich  sources  of  iron  were 
found,  especially  in  the  regions  around  Lake  Superior;  (4)  transporta- 
tion on  the  Great  Lakes  cheapened  th^  cost  of  getting  the  iron  to 
points  on  the  Lakes  southward  where  it  could  meet  the  coal  from  the 
coal  fields;  and  (5)  the  exhaustion  of  the  supply  of  our  free  land, 
which  had  throughout  our  history  been  an  outlet  both  for  labor  and 
capital  as  it  accumulated  in  the  older  sections. 

Monopolies  were  developing  chiefly  from  two  causes.  As  manag- 
ing ability  developed  and  the  size  of  the  business  establishment  grew, 
certain  advantages  resulting  from  large-scale  production  enabled  the 
larger  establishments  to  crush  out  the  smaller;  and  in  some  cases  the 
maxiYnum  unit  of  efficiency  was  so  large  that  one  kept  on  growing 
until  all  rivals  were  crushed.  Then  prices  rose  to  suit  the  notions  and 
avarice  of  the  monopolist.  In  other  cases  where  several  big  rivals 
arose,  none  being  able  to  crush  out  the  others,  various  combinations 
were  made  whereby  competition  ceased  and  prices  went  up  above  the 


ELEMENTS  OF  ECONOMICS  17 

competitive  level. 

Conditions  were  developing  favorable  to  the  growth  of  trade  un- 
ions. There  was  now  more  than  ever  a  permanent  labor  class  because 
a  portion  of  the  labor  supply  could  no  longer,  after  about  1880  at  the 
latest,  escape  to  the  land.  Because  of  this  fact  and  the  incoming  tide 
of  immigration,  wages  in  many  industries  declined,  especially  the 
wages  of  unskilled  labor,  and  even  in  the  skilled  trades  wages  often 
failed  to  increase  in  proportion  to  the  increased  cost  of  living.  Here 
were  the  conditions  which  from  the  nature  of  men  would  cause  unions 
to  grow:  (1)  The  existence  of  a  common  grievance  in  the  shape  of 
low  wages,  (2)  a  class  consciousness  which  would  develop,  and  (3)  the 
feeling  that  in  union  there  would  be  strength  to  get  from  the  em- 
ployer terms  which  the  individual  could  not  secure.  Capitalists  were 
combining  to  create  a  monopoly  against  the  purchasing  public;  labor- 
ers were  combining  to  create  a  monopoly  against  the  employer;  and 
competition,  upon  which  men  the  world  over  had  relied  to  work  out 
industrial  justice,  after  the  state  withdrew  its  restrictions  upon  and 
regulations  of  business  about  a  hundred  years  ago,  ceased  to  exist  in 
several  industries.  The  gilds  of  the  Middle  Ages  had  hampered  busi- 
ness very  much  by  restrictions;  and  when  nations  became  consolidated 
at  the  close  of  the  Middle  Ages  their  central  governments  began  to 
take  charge  of  the  regulation  of  industry.  After  about  three  or  four 
centuries  of  state  regulation  of  wages,  prices  and  other  things,  the 
system  broke  down  and  freedom  of  competition  was  relied  on.  It 
worked  well  for  about  a  century,  until  monopoly  arose,  and  now  state 
regulations  and  state  ownership  are  increasing. 

Out  of  this  complex  situation  our  social  ills  are  growing.  The 
exhaustion  of  the  supply  of  free  land  and  the  great  tide  of  immigra- 
tion are  the  two  main  causes  of  most  of  these  ills.  These  two  forces 
are  bringing  wages  of  unskilled  labor  below  the  starvation  point,  and 
to  keep  body  and  soul  together  the  lower  stratum  of  struggling  hu- 
manity is  crowding  into  filthy  dens  called  tenements  in  order  to  reduce 
the  cost  of  house  rent. 


18  ELEMENTS  OF  ECONOMICS 

Thus  through  countless  ages  of  progress,  man  has  been  increasing 
his  power  over  nature,  increasing  his  accumulations  of  wealth,  in- 
creasing his  capacity  for  enjoying  the  things  of  this  world,  increasing 
his  desire  for  intellectual  and  spiritual  enjoyment,  and  at  the  end  of  it 
all  we  have  the  old  condition,  the  ages-old  condition,  confronting  us; 
for  it  is  ever  the  strong  trying  to  crush  the  weak.  At  one  time  it 
was  the  soldier,  at  another  time  the  great  landlord;  now  it  is  the  great 
monopolist  we  must  fight;  and  we  have  at  one  end  of  the  industrial 
scale  multi-millionaires  and  at  the  other  end  a  considerable  portion 
of  mankind  starving  for  the  necessities  of  life.  To  right  these  wrongs 
is  the  great  all-inclusive  industrial  problem  of  the  age.  This  does 
not  mean  that  no  progress  has  been  made.  The  majority  of  man- 
kind in  civilized  countries  are  today  far  above  the  majority  in  any 
previous  age  in  material  comfort  and  in  intellectual  and  spiritual 
welfare.  But  the  task  of  climbing  upward  is  much  harder  because 
entirely  too  large  a  proportion  of  what  has  been  gained  by  centuries 
of  progress  goes  to  a  very  few.  And  while  the  majority  are  better 
off  than  ever  before,  a  considerable  portion  of  humanity  are  no  better 
off  than  men  were  in  the  savage  state.  And  in  the  United  States  es- 
pecially these  great  social  problems  of  the  unfortunate  "submerged 
tenth"  are  new;  for  such  problems  have  arisen  only  since  our  free 
land  began  to  run  short. 


ELEMENTS   OF   ECONOMICS 


19 


SOCIAL  DEVELOPMENTS 

Croyern- 
ment 

l>roductfon 

The  Econom- 
/c   unii- 

x3oc/qI 

Orga/2  - 

Too/^ 

Trans- 
portat/'oq 

Exchar^e, 

L.abor 

/.ThG. 

■family 

a.nd. 
fukin^ 

1  tOLCh 

■family 

/ncicpen- 

de.nt 

/.Division 

/abor 

/n 
fam//y 

i\Nood^ 
bark, 
bone., 

roi/y/x 
Stor2<s. 

1  On  foot 

and 
by  c  anoe 

'Boj-TGr 

I.EachdIcL 
his  oyi^n 
i/vork 

Trib^ 

Z 
Tasfora/ 

2    Orz 
backs 

of 
animals 

^  Slavery 
/ntro- 
duce^d. 

naif  on 

tura/ 

^S/a/ery 
/rnpor- 
fant 

^A>//sheci 

^yya^ons 
druvvn 

by 
Qni/Tta/s 

^  copper- 

4.  HancL- 
icrciff 

^\//ll<^^ 
or 

Clf/ 

^biv/s/on 

of 
Occu- 

pat/'oa 

^Alone.y 

labor 
/n  clfycs 

/n  Q^f^l- 
culfor^ 
pass 

serfdom. 

Irffo  ^ 

•^t'^cejdom 

4^ 
Bronze 

5.  Tn^ 
na  tion 

s 
Tron 

^Sailin^ 

^  Afoncy 

and 

credit 

factory 

^Af/nutc. 
•Subdi- 

VlJ/O/2 

/cfbor 

lYoric^ 

^7?ull- 
wa.y, 
Steam- 
J.hip 

\ 


20  ELEMENTS  OF  ECONOMICS 

CHAPTER  II. 
The  Laws  of  Consumption . 

11.  SOME  DEFINITIONS.  Before  entering  upon  a  discussion. 
of  the  laws  of  consumption,  several  definitions  must  be  clearly  fixed 
in  mind.  Consumption  is  the  destruction  of  goods.  It  may  assume 
any  one  of  three  forms.  When  goods  are  destroyed  for  the  purpose 
of  producing  other  goods,  as  when  coal  is  burned  to  give  heat  for 
converting  water  into  steam,  or  wool  is  consumed  in  making  cloth,  it 
is  productive  consumption.  When  goods  are  consumed  in  order  to' 
satisfy  our  personal  wants,  it  is  final  consumption.  And  when  goods 
are  destroyed  without  producing  either  of  these  two  results,  as  when 
a  house  or  factory  burns,  it  is  waste. 

Three  terms  are  closely  associated  in  economics,  and  for  all 
practical  purposes  mean  the  same.  These  terms  are,  wants,  needs, 
desires.  In  common  usage  the  term  want  may  mean  desire  or  it  may 
mean  destitution;  need  means  something  one  ought  to  have,  or  some- 
times it  also  means  destitution.  But  in  economics  the  three  words 
simply  mean  desire,  or  a  longing  for  something.  Economic  needs  or 
wants  or  desires  are  those  which  are  related  to  our  getting  a  living, 
and  are  to  be  kept  distinct  from  other  v/ants,  such  as  the  desire  of 
friendship . 

Our  wants  may  be  classified  under  two  heads,  existence  wants  and 
culture  wants.  The  three  great  existence  wants  are  for  food,  clothing 
and  shelter.  These  may  be  called  the  animal  or  physical  wants. 
Culture  wants  include  desire  for  education,  for  satisfaction  of  the 
love  of  the  beautiful  in  nature  and  in  art,  and  desire  for  travel. 
These  are  wants  that  spring  from  our  higher  aesthetic  and  intellect- 
u;al  nature.  Theoretically  these  two  classes  seem  quite  distinct  from 
each  other;  but  in  practice  there  is  no  sharp  dividing  line  between 
them.  Our  desire  for  shelter,  for  example,  leads  us  to  build  a  house; 
but  to  what  extent  does  the  house  serve  to  keep  us  warm  and  pro- 
tected and  to  what  extent  does  it  minister  to  our  love  for  the  beauti- 


ELEMENTS  OF  ECONOMICS  21 

f ul  ?  Or  just  what  sort  of  a  house  would  minister  to  our  animal  wants 
without  appealing  to  our  sense  of  the  beautiful?  And  just  how  good 
would  the  furnishings  need  to  be  to  supply  only  the  demands  of  our 
physical  nature?  It  is  clear  that  no  such  sharp  distinction  can  be 
drawn.  The  subject  assumes  a  practical  phase  when  we  ask  what 
the  working  classes  consider  as  necessary  for  them  to  live  in  decency. 
Our  American  standard  of  decency  in  living  would  be  far  different 
from  that  of  our  ancestors  of  the  colonial  days  or  from  that  of  the 
European  working  men  of  today,  for  the  American  workmen  would 
include  many  things  as  necessary  that  were  -iiot  known  in  colonial 
times  and  are  not  now  enjoyed  by  the  working  classes  of  Europe,  es- 
'  pecially  the  lower  classes  of  labor .  And  the  question  would  assume 
a  still  more  practical  phase  if  thie^^stat^  were  to  establish  a  minimum 
wage,  for  the  minimum  would  naturally  be  high  enough  to  afford  a 
decent  living.  And  a  third  phase  of  the  question  needs  to  be  con- 
sidered, and  that  is  the  effect  of  our  surroundings  upon  our  energy 
and  our  character.  Men  cannot  do  as  good  work  if  they  have  the 
bare  necessities,  using  that  word  in  its  strict  sense,  as  they  can  do  if 
they  have  some  of  the  finer  things  of  life.  The  man  who  goes  to  his 
work  with  the  memories  of  a  pleasant  home  lingering  about  him, 
with  the  thoughts  of  a  good  book  in  his  mind,  with  the  echoes  of 
song  and  music  in  his  soul,  goes  with  a  greater  power  to  do  good 
work  than  he  who  goes  forth  from  the  home  whose  bare  interior  stirs 
within  him  none  of  the  finer  qualities  of  his  nature. 

Another  group  of  terms  that  are  also  closely  associated  are 
utility,  value,  wealth,  price.  Utility  is  the  power  of  satisfyiny  our 
wants.  Four  forms  of  utility  exist.  Some  things  have  utility  be- 
cause of  the  elements  which  they  contain,  as  cotton  fiber  for  making 
thread,  when  it  is  said  to  have  elementary  utility.  When  the  cotton 
is  made  into  thread  or  cloth  or  garments,  or  into  a  form  to  suit  our 
wants,  it  has  form  utility.  When  the  cloth  is  transported  to  market 
where  people  can  get  it,  it  has  place  utility  added  to  it.     And  when  it 


22  ELEMENTS   OF   ECONOMICS 

is  brought  to  our  door  when  we  need  it,  place  utility  is  again  added 
and  also  time  utility.  The  want  that  is  satisfied  may  be  for  things 
for  productive  consumption  or  for  final  consumption.  In  the  latter  case 
the  goods  possess  all  four  kinds  of  utility.  Value  is  power  in  ex- 
change. Some  things,  such  as  air  and  sunlight,  may  have  the  great- 
est utility,  but  they  are  free  goods  and  have  no  power  in  exchange, 
and  hence  have  no  value.  Wealth  is  anything  which  has  value. 
Price  is  value  reckoned  in  terms  of  money. 

12.  THE  LAW  OF  SATIETY.  The  laws  of  consumption  grown 
out  of  human  nature  and  their  proof  is  found  in  human  experience. 
One  of  these  laws,  called  the  law  of  satiety,  is,  that  any  one  want 
can  be  fully  satisfied.  This  does  not  mean  that  any  want  can  be  so 
fully  satisfied  now  that  we  shaTT  not  experience  that  desire  in  the 
future.  It  means  that  during  any  given  time  any  want  can  be  sat- 
isfied, if,  of  course,  we  have  the  commodity  in  sufficient  quantity. 
Our  want  for  bread,  for  example,  can  be  completely  satisfied  from 
day  to  day,  so  that  we  would  not  consume  any  more  if  it  could  be  had 
for  the  asking.  Our  want  for  hats,  say,  might  not  be  so  easily  sat- 
isfied, but  clearly  there  is  a  limit  beyond  which  we  would  not  be 
bothered  with  any  more .  Our  desire  for  culture  is  still  more  ex- 
pansible and  not  so  easily  satisfied,  and  it  may  seem  that  this  is  an 
exception  to  the  law.  But  desire  for  culture  is  complex,  and  if  we 
take  our  desire  for  a  particular  line  of  culture  and  for  the  things  that 
satisfy  that  particular  line,  we  can  see  that  such  desire  is  not  unlim- 
ited. The  desire  for  money  may  seem  an  exception  to  the  rule,  but 
money  satisfies  no  want  directly,  but  is  a  means  of  satisfying  all 
wants;  and,  as  we  will  learn  later,  when  one  want  becomes  satisfied 
others  spring  up,  hence  it  follows  that  though  the  desire  for  money 
cannot  be  satisfied,  this  does  not  contradict  the  law  of  satiety. 

This  law  is  one  of  the  most  fundamental  and  far-reaching  in 
economic  science,  for  it  underlies  most  of  the  other  laws  of  con- 
sumption, and  the  laws  of  value  are  partly  built  upon  it.     No  human 


ELEMENTS  OF  ECONOMICS  23 

progress  would  have  been  possible  if  this  law  had  not  been  true,  be- 
cause otherwise  men  would  have  spent  all  their  time  and  energies 
satisfying  the  lower  wants. 

13.  THE  LAW  OF  VARIATION  OF  UTILITY.  Directly  out  of 
the  law  of  satiety  grows  another  law,  the  law  of  the  variation  of  util- 
ity. This  law  is,  that  the  utility  of  a  given  unit  of  a  commodity 
varies  inversely  with  the  supply.  That  is,  the  more  wheat  there  is 
the  less  importance  we  attach  to  a  bushel  of  it.  Since  we  want  only 
about  so  much  of  it  during  the  year,  the  more  wheat  there  is  the 
more  fully  can  that  want  be  satisfied,  and  as  the  want  becomes  more 
fully  satisfied  we  care  less  about  possessing  an  additional  bushel. 
If  apples  were  scarce  we  might  be  willing  to  pay  two  dollars  a 
bushel  for,  say,  ten  bushels  to  put  in  the  cellar  for  our  wint<3r*s  use. 
If  they  were  very  plentiful  and  sold  at  fifty  cents  a  bushel  we  prob- 
ably might  buy  twenty  bushels,  if  we  had  a  large  family.  But  if  ap- 
ples sold  at  twenty-five  cents  a  bushel  we  would  not  greatly  increase 
our  winter's  supply,  because  we  would  not  use  them  all.  This  illus- 
trates the  practical  importance  of  the  law  of  satiety  and  of  the  law 
of  vaHation  of  utility  which  grows  out  of  the  law  of  satiety.  Upon 
these  two  laws  are  based  largely  the  calculations  of  the  commercial 
world.  This  illustrates  also  the  close  relationship  between  these 
two  laws.  The  law  of  the  variation  of  utility  is  really  implied  in  the 
law  of  satiety,  for  if  a  want  can  be  satisfied  more  and  more  com- 
pletely it  simply  means  that  our  desire  for  each  additional  unit  of 
the  commodity  grows  less. 

14.  MARGINAL  AND  TOTAL  UTILITY.  Out  of  these  two 
laws  springs  the  conception  of  marginal  or  final  utility,  which  seems 
so  puzzling  to  those  just  beginning  the  study  of  economics,  but  which 
becomes  perfectly  simple  if  we  will  just  keep  in  mind  the  above  laws 
of  consumption.  Marginal  or  final  utility  is  the  utility  of  the  last,  or 
least  important,  unit  of  the  supply.  The  utility  of  each  unit  of  a 
given  supply  is  of  course  the  same.     But  since  the  utility  of  each 


24  ELEMENTS  OF  ECONOMICS 

unit  diminishes  as  the  supply  is  increased,  it  is  convenient  to  think  of 
the  last  unit  added  to  the  supply  as  the  marginal  or  final  unit,  and 
consequently  as  having  the  least  utility,  or  as  being  the  least  im- 
portant unit  of  the  supply.  Salt,  for  example,  has  several  uses. 
Its  most  important  use  is  for  cooking  and  preserving  food.  A  less 
important  use  is  to  melt  the  ice  on  the  walk  in  winter  or  to  kill  weeds 
in  summer.  If  that  were  the  least  important  use  to  which  salt  could 
be  put,  and  if  there  were  enough  to  supply  all  needs  for  the  table,, 
and  for  cooking  and  preserving  food  and  some  to  use  for  killing 
weeds,  or  melting  ice,  this  would  measure  the  marginal  utility  of  salt 
or  the  utility  of  any  unit  in  a  supply  that  large.  But  the  idea  of 
marginal  utility  applies  even  if  a  commodity  has  but  one  use,  because 
of  the  law  of  satiety.  Take  bread  for  example.  Suppose  it  had  but 
one  use,  that  of  satisfying  the  hunger  of  human  beings.  If  there 
were  only  enough  to  partially  satisfy  our  wants  for  that  kind  of  food 
so  that  we  would  be  compelled  to  satisfy  the  remainder  of  our  want 
with  something  less  suitable  and  less  desirable,  the  marginal  utility 
of  wheat  would  be  high.  If  on  the  other  hand  there  were  an  abun- 
dance of  wheat  so  that  we  could  get  all  we  wanted  of  it,  its  marginal 
utility  would  be  low. 

Marginal  utility  is  to  be  distinguished  from  total  utility,  which 
is  the  utility  of  the  whole  supply.  In  case  of  a  necessity,  say  of  the 
total  wheat  crop  of  any  year,  its  total  utility  is  infinite,  in  case  we 
could  get  no  other  food  or  substitute,  for  we  would  starve  without  it. 
But  the  marginal  utility  of  that  same  commodity  may  be  small. 

There  are  some  interesting  applications  of  this  distinction  be- 
tween total  and  marginal  utility,  the  most  important  of  which  is  that 
marginal  and  not  total  utility  measures  the  importance  of  goods.  In 
other  words,  it  is  marginal  and  not  total  utility  that  helps  determine 
the  price  of  an  article.  From  this  it  may  happen  that  a  large  grain 
crop  might  sell  for  less  than  a  small  crop,  that  is,  the  total  value  of 
the  large  crop  would  be  less  than  the  total  value  of  small  crop;  but 


ELEMENTS  OF  ECONOMICS  25 

this  is  not  true  of  the  total  utility  of  the  large  crop,  because  total 
utility  increases   with   the   quantity. 

15.  THE  LAW  OF  DEMAND.  Another  great  law  of  the  business 
world  is  the  law  of  demand.  By  demand  is  meant  the  offer  to  buy. 
The  amount  of  a  commodity  that  we  will  buy  depends  upon  three 
things,  its  marginal  utility  to  us,  the  price,  and  the  amount  of  our 
income.  If  the  marginal  utility  is  high,  that  means  that  our  desire 
for  that  thing  has  not  been  very  completely  satisfied  and  our  demand 
for  it  is  strong.  If  the  marginal  utility  of  a  commodity  is  low  it 
means  that  our  desire  for  it  has  been  fairly  well  satisfied  and  we  do 
not  care  very  much  about  any  more  of  it.  The  utility  of  some 
things  does  not  depend  upon  their  quantity  but  upon  their  quality  or 
style.  If,  for  example,  a  hat  is  out  of  style  its  selling  price  will  drop 
perhaps  to  a  small  fraction  of  its  price  when  it  was  in  style,  though 
there  may  be  but  few  like  it  on  the  market.  The  utility,  that  is,  the 
marginal  utility  of  other  things  in  which  style  plays  no  part,  as  wheat, 
for  example,  depends  upon  the  quantity.  Our  conclusion  thus  far  is 
that  demand  varies  directly  with  marginal  utility. 

The  price  of  an  article  affects  its  demand  because  our  income 
is  limited.  If  the  price  of  an  article  goes  up  and  we  purchase  the 
same  amount  that  we  did  when  the  price  was  low  we  will  be  de- 
prived of  something  we  are  accustomed  to,  or  else  we  shall  have  to 
Increase  our  expenditures  for  final  consumption  and  consequently  have 
less  of  our  income  to  "save  for  the  rainy  day."  If  the  price  goes  down 
we  are  tempted  to  buy  more  in  order  the  more  completely  to  satisfy 
our  desire  for  that  thing,  unless  our  desire  has  already  been  satisfied. 
Then,  too,  it  may  be  that  by  purchasing  more  of  the  article  that  has 
fallen  in  price  we  can  decrease  our  expenditure  for  some  article  that 
is  more  costly  but  which  answers  the  same  purpose  as  the  cheaper 
article,  and  by  so  doing  we  could  reduce  our  expenditure  for  final 
consumption  or  buy  something  we  have  before  wanted  but  considered 
beyond  our  means.  Hence  it  follows  that  demand  varies  inversely 
with  the  price. 


26  ELEMENTS  OF  ECONOMICS 

Demand  depends  also  upon  the  amount  of  our  income.  If  our  in- 
come increases  we  will  buy  more  of  all  those  things  for  which  our 
desire  had  not  already  been  fully  satisfied.  Ordinarily,  this  would 
mean  that  our  demand  for  all  but  a  few  great  staple  articles  such  as 
bread,  salt,  and  other  articles  of  absolute  necessity,  would  increase, 
because  in  most  cases  we  do  not  consume  all  we  would  if  we  had 
more  money.  Most  people  would  buy  more  and  better  clothes,  more 
and  better  furniture,  have  better  houses,  and  increase  their  expendi- 
ture along  many  lines  if  they  had  more  income.  We  may  therefore 
put  all  three  things  together  and  state  the  law  of  demand  as  follows: 
Demand  for  a  commodity  varies  directly  with  its  marginal  utility  and 
the  amount  of  our  income  and  inversely  with  its  price.  This  is  the 
great  law  that  all  business  men  must  understand  and  take  into  ac- 
count in  their  commercial  transactions. 

16.  THE  LAW  OF  ELASTICITY  OF  DEMAND.  In  our  dis- 
cussion above  there  is  implied  another  law  which  is  called  the  law  of 
elasticity  of  demand.  This  law  is,  that  demand  for  necessities 
changes  less  than  demand  for  luxuries,  with  changes  in  price  or  in 
our  income.  Things  that  are  really  necessary  to  support  life  we 
must  have  and  the  price  has  little  to  do  with  the  amount  demanded, 
unless  some  substitute  can  be  found  for  them.  Usually  this  is  true 
to  some  extent,  and  for  that  reason  the  demand  even  for  necessities 
varies  with  the  price.  But  the  great  staple  articles  of  food  and  cloth- 
ing people  must  have  in  fairly  constant  quantities,  and  changes  in 
price  do  not  affect  demand  very  greatly.  But  if  the  price  of  a  luxury 
goes  up  demand  must  fall  off  from  all  those  who  have  only  a  moderate 
income,  for  if  they  continued  to  consume  the  same  quantity  of  luxuries 
as  before  they  would  not  have  enough  left  with  which  to  satisfy  the 
more  urgent  needs.  If  the  price  of  luxuries  fall  we  are  tempted  to 
buy  more,  in  order  more  completely  to  satisfy  desires  only  partially 
gratified  before.  But  if  the  price  of  necessities  goes  down  we  will 
not  demand  very  much  more  or  possibly  no  more  because  we  have 
about  all  we  want  of  necessities,  unless  we  are  of  that  unfortunate 


ELEMENTS  OF  ECONOMICS  27 

class  who  are  underfed  and  insufficiently  clothed.  We  may  lay  it 
down  as  a  general  rule,  therefore,  that  demand  for  necessities  is  less 
elastic  than  demand  for  luxuries. 

From  this  law  some  interesting  and  important  changes  in  prices 
will  follow  changes  in  supply.  If  there  is  a  comparatively  slight  de- 
crease in  the  yield  of  wheat  or  corn  it  will  send  the  price  very  high. 
Since  people  want  about  so  much  of  these  things,  producers  and  mer- 
chants will  take  advantage  of  the  shortage  and  boost  prices,  knowing 
that  people  will  buy,  regardless  of  the  p/rice.  Within  a  few  weeks 
in  1915  the  price  of  sugar  doubled  on  account  of  the  war  in 
Europe;  but  merchants  say  they  can  see  no  decrease  in  demand  for 
sugar.  If  on  the  other  hand  there  is  an  extra  large  crop  of  grains, 
prices  will  go  very  low,  because  merchants  and  producers  know  that 
there  will  be  difficulty  in  getting  rid  of  the  whole  supply,  and  they 
louver  prices  to  tempt  people  to  buy  more.  Competition  hastens  this 
process,  since  each  producer  and  dealer  fears  that  rivals  will  lower 
prices  first  and  supply  the  demand.  An  oversupply  of  luxuries  on 
the  other  hand  would  have  no  such  a  depressing  effect  on  prices, 
since  a  slight  drop  in  prices  might  increase  the  demand  enough  to  ab- 
sorb the  supply;  while  a  shortage  in  a  luxury  would  not  send  prices 
so  high  as  in  case  of  a  necessity  because  a  rise  in  prices  decreases  de- 
mand very  greatly,  specially  of  an  article  used  quite  widely  among  the 
people.  Thus  there  is  a  law  of  elasticity  of  price,  which  may  be 
stated  thus:  the  price  of  luxuries  changes  less  than  the  price  of 
necessities  with  changes  in  supply. 

The  law  of  elasticity  of  demand  has  many  applications  in  the 
business  world.  One  of  the  most  important  applications  is  made  by 
monopolists.  In  case  a  monopolist  controls  a  necessity  he  can  injure 
people  greatly  because  he  can  put  the  price  at  an  unreasonably  high 
figure  without  greatly  decreasing  demand.  If  the  monopoly  controls 
a  luxury,  however,  consumers  are  not  so  completely  at  its  mercy,  be- 
cause if  the  price  goes  up  they  can  cease  to  buy  and  then  the  monopo- 
list will  "come  to  time"  and  keep  his  prices  reasonable. 


28  ELEMENTS  OF  ECONOMICS 


17.  THE  LAW  OF  THE  ECONOMIC  ORDER  OF  CONSUMP- 
TION. Closely  associated  with  the  general  law  of  demand  is  another 
law  called  the  law  of  the  economic  order  of  Consumption  which  is, 
that  the  commodities  we  consume  and  their  relative  quantities  de- 
pend upon  their  relative  marginal  utility  and  relative  prices  and  the 
amount  of  our  income.  It  will  be  observed  that  the  same  forces  that 
determine  the  conomic  order  of  consumption  also  determine  demand. 
The  economic  order  of  consumption  is  in  fact  only  the  result  of  the 
relative  strength  of  our  demand  for  different  things,  while  the  law  of 
demand  looks  at  the  strength  of  our  demand  for  a  single  thing  onlyV 
As  a  matter  of  fact,  however,  when  we  are  considering  whether  or  not 
we  will  buy  more  of  a  certain  thing  we  either  consciously  or  uncon- 
sciously think  of  what  it  will  cost  us  as  compared  with  something 
else  we  want,  and  whether  the  thing  in  question  will  give  us  more 
enjoyment  than  something  else,  and  whether  we  should  buy  anything 
more  or  save  our  money  for  further  use.  Hence  these  two  laws,  the 
general  law  of  demand  and  the  law  of  the  economic  order  of  consump- 
tion are  looking  at  the  same  conditions  and  the  same  forces  but  from 
different  points  of  view. 

Let  us  be  sure  that  we  know  what  the  economic  order  of  con- 
sumption is  and  what  the  law  governing  it  means.  The  thing  about 
which  this  law  is  concerned  might  be  called  the  family  or  private 
budget.  The  economic  order  of  consumption  does  not  refer  especial- 
ly to  the  order  in  which  things  are  purchased  and  consumed,  though 
the  name  implies  that;  but  it  refers  to  the  amount  of  our  consump- 
tion of  different  things  during,  say,  the  year.  Some  people  include 
in  their  consumption  silks  and  satins  and  furs,  automobiles,  splendid 
mansions,  and  all  sorts  of  things;  other  people  lay  up  treasures  in 
books,  works  of  art,  and  things  that  appeal  to  the  intellectual  nature; 
still  other  people  consume  none  of  these  things,  or  but  very  few. 
Again  two  persons  might  include  in  the  list  of  things  they  consume 
about  the  same  articles,  but  the  relative  amounts  consumed  by  the 
two  persons  might  be  very  different .     The  law  of  the  economic  order 


ELEMENTS   OF   ECONOMICS  29 

of  consumption  tells  us  why  these  facts  are  so. 

Why  does  the  range  of  our  consumption  and  the  relative  amounts 
of  our  consumption  depend  upon  relative  marginal  utility,  relative 
prices  and  the  amount  of  our  income?  Why  do  some  people  buy  au- 
tomobiles, for  example,  and  some  not?  The  answer  is  simple.  Some 
cannot  afford  it,  by  which  is  meant  that  if  they  buy  luxuries  they 
will  deprive  themselves  of  things  more  necessary  and  hence  have 
less  pleasure  with  the  automobile  than  without  it.  Others  may  have 
plenty  of  money  to  spend  for  such  things  but  do  not  care  for  autos, 
that  is,  they  get  more  pleasure  out  of  other  forms  of  luxury.  Gener- 
ally speaking,  the  smaller  the  income  the  greater  is  the  relative 
proportion  that  must  be  expended  for  necessities.  In  too  many 
cases,  however,  perverted  tastes  cause  people  to  spend  a  large  portion 
of  a  small  income  upon  such  things  as  liquor,  tobacco  and  harmful 
amusements,  and  as  a  result  not  enough  income  is  left  for  necessities . 
This  law  tells  us  many  things  about  the  consumption  of  the  commu- 
nity. If  some  things  are  especially  cheap  we  are  tempted  to  buy 
more  of  them  and  less  of  something  else,  so  that  we  may  get  more 
satisfaction  out  of  the  total  expenditure,  or  so  that  we  may  get  the 
same  satisfaction  for  less  money  and  lay  by  more  for  the  future. 
If  apples  are  fifty  cents  a  bushel  and  oranges  three  dollars  a  bushel ,. 
those  whose  income  is  moderate  in  amount  would  spend  considerably 
more  on  apples  than  on  oranges.  But  if  apples  are  as  high  as  or- 
anges people  would  buy  fewer  apples  and  more  oranges. 

This  law  gives  us  a  basis  for  the  study  of  the  family  budgets  of 
the  community.  It  also  suggests  the  study  of  right  living  and  wrong 
living.  It  leads  us  into  the  study  of  extravagance,  of  perverted 
tastes,  of  right  and  wrong  conceptions  of  the  relative  value  of  things 
in  human  life.  If,  for  example,  we  discover  people  with  small  in- 
comes trying  to  copy  after  the  rich  in  their  expenditure,  we  con- 
clude that  they  are  not  wise  in  this  matter,  since  too  small  a  portion 
of  their  income,  or  none  at  all,  is  going  to  the  support  of  their  old 


30  ELEMENTS   OF   ECONOMICS 

age.  Their  judgment  is  wrong,  since  they  value  present  show  more 
than  decent  comfort  in  their  daclining  years.  If  again  we  discover 
men  spending  for  liquor  and  tobacco,  even  in  moderate  quantities,  we 
conclude  that  they  too  have  perverted  tastes  and  poor  judgment, 
since  they  are  feeding  depraved  appetites  to  the  detriment  of  their 
better  nature.  If  again  we  discover  the  rich  spending  large  sums  on 
automobiles,  dress,  parties,  and  amusements,  and  comparatively  little 
on  books,  music,  works  of  art,  we  conclude  that  their  tastes  too  are 
perverted,  and  that  our  civilization  has  failed  to  create  in  them  de- 
sire for  intellectual  culture.  And  these  conclusions  should  lead  us 
to  examine  our  social  institutions  to  see  why  they  are  thus  failing  to 
give  the  people  right  tastes,  why  our  civilization  is  not  leading  men 
upward  more  into  the  higher  life  instead  of  creating  in  them  a  desire 
only  for  material  things. 

18.  LAW  OF  DEVELOPMENT  OF  WANTS.  Such  a  study 
would  lead  us  to  discover  another  law  of  consumption,  the  law  of  de- 
velopment of  wants,  which  is,  that  when  existence  wants  become 
fairly  well  satisfied  culture  wants  spring  up  without  any  assignable 
limit.  It  should  be  noted  that  this  law  has  three  distinct  points  to 
it,  or  in  other  words,  it  is  composed  of  three  distinct  statements. 
The  central  idea  is  that  new  wants  develop;  but  they  will  not  develop 
until  after  the  lower  wants  are  fairly  well  satisfied,  and  the  number 
of  new  wants  that  may  spring  up  we  have  no  means  of  knowing, 
since  they  are  now  growing  more  rapidly  than  ever  before,  after 
thousands  of  years  of  development.  This  law  is  true  because  of 
human  nature.  Man  alone  of  the  animal  creation  is  endowed  with 
the  capacity  thus  to  progress.  The  conditions  under  which  new 
wants  develop  are  as  stated  because  of  human  nature.  These  con- 
ditions are  simply  two  primary  laws  of  consumption  incorporated 
into  this  more  complex  law.  These  two  primary  laws,  it  will  be  ob- 
served, are  the  law  of  satiety  and  the  law  of  relative  intensity  of 
wants. 

This    law   has    a   very    important    application    which    our    social 


ELEMENTS   OF   ECONOMICS  81 

workers  and  society  in  general  are  beginning  to  understand.  For 
years  our  "college  settlement"  workers  and  "slum"  workers  seemed 
to  be  under  the  delusion  that  what  the  lower  classes  chiefly  needed 
was  religion  and  Sunday  schools.  But  such  workers  now  realize  that 
men  cannot  be  lifted  bodily  into  the  higher  life  and  that  they  cannot 
develop  into  it  unless  they  first  have  means  of  satisfying  the  lower 
wants.  Little  can  be  done  to  elevate  people  into  a  higher  life  if 
their  income  is  insufficient  to  enable  them  to  satisfy  existence  wants. 
Generally  speaking,  man  develops  through  a  slow  process  of  evolu- 
lion,  though  the  power  of  religion  often  suddenly  reforms  men  who 
Lave  lived  in  the  midst  of  higher  things  but  have  cast  off  their  in- 
fluence and  followed  the  downward  road.  Not  only  among  the  de- 
graded elements  at  the  bottom  of  the  social  scale  do  we  find  the  great 
law  of  development  of  wants  illustrated;  we  find  it  exemplified  among 
the  working  classes  and  other  people  with  small  incomes.  The  more 
enlightened  portion  of  the  community  has  a  constant  struggle  to  in- 
duce those  classes  to  give  their  children  a  sufficient  education  to  en- 
able them  to  develop  into  men  of  a  higher  type.  Most  people  are 
satisfied  with  the  rudiments  of  an  education  and  satisfied  if  their 
children  have  the  same .  And  if  the  time  ever  comes  when  the  masses 
will  care  much  about  real  culture  it  will  be  when  incomes  are  suffi- 
cient to  enable  them  to  satisfy  much  more  fully  than  they  can  now 
the  wants  at  the  lower  end  of  the  scale.  The  masses  will  never  ex- 
perience a  very  keen  desire  for  things  that  cultivate  the  mind  and 
enrich  the  soul  so  long  as  they  live  in  hovels  or  dingy  flats  and  take 
their  pleasure  rides  in  crowded  street  cars,  while  their  neighbors 
live  in  splendid  mansions  and  ride  in  automobiles.  And  if  some  few 
should  aspire  to  give  their  children  a  higher  education  it  would  be 
chiefly  with  the  hope  that  their  children  may  some  day  own  a  fine 
mansion  and  an  automobile,  rather  than  that  they  may  enjoy  a 
higher  intellectual  and  spiritual  life. 

This  law  of  development  helps  us  to  understand  another  phase 
of  our  civilization,  and  that  is  what  is  called  its  materialistic  nature. 


32  ELEMENTS  OF  ECONOMICS 

A  large  portion  even  of  the  rich  seem  to  seek  pleasure  almost  ex- 
clusively in  material  things.  This  is  explained  partly  by  the  ex- 
pansibility of  our  wants  v^hen  bare  necessities  are  provided  for.  In 
the  realm  of  desires  that  lie  midway  between  absolute  necessities 
and  purely  intellectual  and  spiritual  wants  are  the  desires  for  the 
finer  material  things  and  forms  of  pleasure  which  have  in  them 
something  of  the  intellectual  and  spiritual  element  but  which  largely 
satisfy  physical  enjoyment.  In  fine  houses  and  furniture  and  auto- 
mobiles there  is  much  that  elevates  and  refines;  but  such  material 
things  do  not  primarily  cultivate  the  mind  as  does  the  study  of  book^, 
of  nature,  and  of  art.  Modern  invention  has  so  multiplied  these 
material  things  that  give  us  mainly  physical  pleasure,  and  there 
seems  to  be  so  much  room  for  expansion  of  this  class  of  wants,  that 
'the  development  of  the  real  higher  life  of  the  race  is  somewhat 
checked.  These  finer  material  things  are  good  to  have  and  man  must 
have  them  to  develop  properly;  but  when  we  spend  so  much  of  our 
time  and  means  and  energy  in  seeking  pleasure  from  these  material 
things  that  the  study  of  good  books  and  of  nature  and  art,  and  even 
attendance  upon  divine  worship,  is  neglected,  the  too  great  multipli- 
cation of  these  material  things  is  much  to  be  regretted. 

19.  ENGEL'S  LAW.  Economists  include  among  the  laws,  of 
consumption  a  law  named  from  a  German  statistician.  Dr.  Engel. 
This  is  not  a  law  distinct  from  those  already  considered,  but  it  merely 
illustrates  these  laws  of  consumption.  Dr.  Engel  made  a  detailed 
study  of  family  expenditures  among  the  working  classes  in  Saxony, 
the  incomes  of  the  families  ranging  from  $225.00  to  $1100.00  a 
year.  His  conclusions  were  that  as  the  incomes  increased,  (1)  ex- 
penditures for  food  increased,  but  not  in  proportion  to  the  increase 
in  income,  (2)  expenditure  for  clothing  increased  nearly  in  proportion 
to  increase  in  income;  (3)  expenditure  for  rent,  fuel  and  light  in- 
creased in  proportion  to  income;  and  (4)  expenditure  for  education, 
recreation,  health,  etc.,  increased  more  than  income  increased.  His 
tables  show  some  remarkable  results.     Families  with  about  $300.00 


ELEMENTS  OF  ECONOMICS  33 

a  year  income  expended  about  $180.00  on  food  while  families  with 
$1000.00  a  year  income  expended  about  $500.00  on  food.  This  shows 
either  that  the  families  with  the  smaller  income  are  greatly  underfed 
or  else  the  families  with  the  larger  income  are  extravagant.  In- 
vestigation would  doubtless  show  that  both  conditions  exist.  Investi- 
gations by  the  U.  S.  Department  of  Labor  show  results  similar  to 
those  obtained  by  Dr.  Engel,  though  there  are  some  interesting 
variations  in  details.  For  example,  in  the  U.  S.  the  expenditure 
for  food  increased  much  less  than  in  Saxony,  with  the  increase  in  in- 
come, and  the  American  family  with  $1000.00  a  year  income  spends 
considerably  less  than  the  Saxon  family  with  the  same  income,  the 
former  spending  about  $350.00  for  food  and  the  latter  about  $500.00. 
On  the  other  hand,  the  expenditure  of  the  American  families  for 
education,  health  and  recreation  increased  much  more  rapidly,  with 
increase  of  income,  than  the  expenditure  of  the  Saxon  families  for 
such  things.  This  indicates  that  the  American  working  classes 
sp6nd  more  wisely  than  the  Saxon  working  classes,  if  the  investiga- 
tions in  both  cases  included  families  typical  of  their  class. 


ELEMENTARY  LAl/l^S  DERIVED  LAIVS 

/■  ySa/-/G/K- A  l^r/a//o/?  of  0/-////}/ 

•_ \ ^  J  ^ ^. 


^/ 


\  \ 


3  De?7)and  varies^  ^    ^^-^Eccnom/c order 

' s  /     ^  "y  ' — — 

d/rccf/y  \^^//h  /ncorh^  "  ^^     _  ofCon^umpt/on 

4  Ex/^fer?CG.  v\/cir}'tsar^ ^ 4-'E/o^//c/Ty  C^ 


34  ELEMENTS  OF  ECONOMICS- 

CHAPTER  III. 

Problems  of  Consumption. 

20.  THE  STANDARD  OF  LIVING.  Problems  of  consumption 
center  around  the  standard  of  living.  Of  these  problems  three  are  of 
special  importance,  the  housing  problem,  the  liquor  problem  and  the 
extravagance  of  the  rich.  These  three  problems  will  be  considered 
in  this  chapter. 

The  standard  of  living  means  either  of  two  somewhat  different 
things.  It  may  mean  merely  the  present  conditions  under  which  one 
is  living,  without  reference  to  any  ideal  in  the  person's  mind,  or  it 
may  mean  an  ideal  condition  which  one  is  struggling  to  reach  or  main- 
tain. In  the  former  case  people  are  just  drifting  with  the  tide,  so  to 
speak,  taking  whatever  comes  along  without  attempting  to  better 
their  condition.  In  the  latter  case  people  are  either  endeavoring  to 
maintain  their  condition  against  adverse  circumstances  or  else  they 
are  trying  to  improve  their  standard  of  living  for  themselves  or 
their  children. 

The  standard  of  living  in  either  sense  is  of  vast  importance  to 
society,  for  it  measures  very  largely  the  height  to  which  civilization 
has  risen  or  will  rise  in  the  future.  It  makes  a  vast  difference  to  the 
friends  of  humanity  striving  to  help  elevate  the  lower  classes, 
whether  those  classes  are  just  drifting  without  any  definite  standard 
or  are  struggling  to  improve  their  conditions.  In  the  latter  case  social 
workers  meet  with  a  ready  response  from  the  lower  classes  when  as- 
sistance is  offered,  and  in  the  other  case  those  classes  resent  any  at- 
tempts to  help  them.  The  standard  of  living  is  important  in  another 
sense.  The  conditions  under  which  children  are  brought  up  determine 
largely  their  character.  It  is  impossible  to  tell  just  what  part  hered- 
ity plays  in  determining  character,  but  experience  shows  at  least  that 
environment  is  a  powerful  factor  in  determining  character.  And  the 
effects  for  good  or  for  ill  are  cumulative.     If  people   start  on  the 


ELEMENTS  OF  ECONOMICS  35 

downward  road  they  drag-  the  coming  generation  down,  and  each 
succeeding  generation  is  lower  than  the  one  preceding  it.  Such  was 
the  history  of  Rome  during  the  later  centuries  of  its  existence.  If  a 
nation  is  on  the  upward  road  each  generation  rises  higher  than  the 
preceding,  so  long  as  conditions  are  favorable  for  the  succeeding 
generation.  In  the  standard  of  living,  therefore,  civilization  is  at 
stake . 

This  standard  of  living  includes  the  sum  total  of  our  material 
surroundings,  the  food  w^e  eat,  the  clothes  we  wear,  the  houses  we  live 
in,  the  books  we  read,  our  amusements,  and  the  whole  round  of  our 
daily  lives.  And  each  and  all  of  these  things  has  a  decided  effect 
upon  our  character.  Even  the  clothes  we  wear  affect  our  character 
and  that  of  others  around  us,  for  if  our  style  of  dress  is  immodest, 
the  purity  of  our  thoughts  is  contaminated  and  the  contagion  spreads 
more  or  less  to  those  around  us.  And  so  with  each  item  of  our  ma- 
terial -existence,  for  each  has  its  effect  upon  our  character. 

21.  THE  HOUSING  PROBLEM.  Probably  the  most  important 
problem  of  consumption  is  the  housing  problem.  The  home  is  the 
chief  character  builder.  During  the  first  few  years  of  the  child's  life, 
the  home,  with  its  surroundings,  whether  city  streets,  back  yards 
and  alleys,  or  the  broad  fields,  is  the  only  social  institution  with 
which  the  child  comes  in  contact.  During  later  childhood  the  school 
and  the  church  begin  to  add  their  influences  to  those  of  the  home. 
But  even  then  the  child  is  at  school  but  a  few  hours  in  the  day  and  at 
church  but  a  few  moments  a  week,  if  at  all,  and  the  home  continues  in 
most  cases  to  be  the  chief  factor  in  the  child's  life. 

Our  housing  problem  is  a  vast  one;  for  it  is  estimated  that  about 
ten  millions  of  people  in  the  United  States  are  living  in  wretched 
places  called  homes  which  are  entirely  unfit  for  human  habitation. 
The  housing  problem  has  until  recently  been  considered  a  problem  of 
private  charity  to  a  considerable  extent.  But  it  is  at  once  apparent 
that  the  problem  is  too  vast  for  private  charity,  even  organized  private 


36  ELEMENTS  OF  ECONOMICS 

charity,  to  deal  with.  Morever,  some  consistent,  proper,  uniform  policy- 
must  be  pursued  if  we  are  to  remove  the  causes  of  the  evil  conditions- 
in  these  so-called  homes,  and  it  requires  the  authority  of  law  to  carry 
out  such  a  policy.  These  ten  millions  of  people  must  themselves  be 
reformed  and  be  given  an  opportunity  to  improve  their  conditions 
before  there  can  be  any  improvement  in  their  homes.  If,  for  example^ 
low  wages  or  drunkenness  were  causes  of  people  living  in  miserable 
dens,  it  would  require  the  power  of  public  authority  to  d'Sal  with  the 
situation  and  attempt  to  remove  the  causes. 

Again  the  housing  problem  has  been  considered  a  local  one.  But ' 
any  conditions  which  so  vitally  affect  the  lives  of  such  a  large  portion 
of  our  population  and  which  are  found  in  every  state  in  the  Union  and 
in  every  considerable  city  of  every  state,  are  not  a  local  matter.  Such 
evil  conditions  breed  vice  and  crime  and  the  whole  people  suffer  in 
consequence.  If  the  city  breeds  criminals  and  beggars  they  prey 
upon  city  and  country  districts  alike.  If  a  degraded  city  popula- 
lation  enables  a  corrupt  political  ring  to  maintain  its  power  over 
city,  state  or  national  governments,  the  whole  country  suffers. 
Hence,  the  housing  of  these  ten  millions  of  people  is  aT  matter  de- 
manding the  cooperation  of  city,  state,  and  nation.  This  coopera- 
tion is  necessary  not  merely  because  all  are  affected,  but  because 
cooperative  effort  is  necessary  in  order  to  carry  out  any  plans  to  re- 
move the  causes  of  bad  housing  conditions.  For  instance,  just  now 
the  problem  of  unemployment,  one  of  the  causes  of  bad  housing 
conditions,  is  being  much  considered,  and  social  workers  suggest 
that  public  employment  bureaus  be  established  by  the  cities,  by 
the  state  and  by  the  national  government,  in  order  to  cooperate  if 
there  is  any  demand  for  labor  in  other  parts  of  the  country  where 
laborers  are  scarce,  and  if  work  cannot  be  found  for  all  with  private 
employers,  the  different  governments  should  employ  them  on  public 
works  during  the  dull  seasons.  To  conclude,  the  housing  problem  is 
a  public  problem  of  vital  importance,  to  be  solved  by  the  cooperative 
efforts  of  cities,  states,  and  the  nation. 


ELEMENTS  OF  ECONOMICS  37 

22.  EVIL  CONDITIONS.  It  is  impossible  in  a  few  pages  to  give 
an  adequate  conception  of  housing  conditions  in  our  "slums";  the 
essential  points  will  therefore  be  touched  upon  briefly.  Bad  condi- 
tions may  be  grouped  under  five  heads,  overcrowding,  foul  air,  lack 
of  sunlight,  filth,  ugliness.  Overcrowding,  especially  in  large  cities, 
has  two  phases,  too  many  in  a  given  space  of  the  city  and  too  many 
per  tenement.  In  our  smaller  cities  the  latter  phase  of  congestion 
is  the  more  pronounced.  In  New  York  City  there  are  eleven  blocks 
in  the  lower  part  of  the  city  that  contain  thirteen  hundred  persons 
per  acre.  At  that  rate  little  Delaware  would  hold  all  the  people  in 
the  world.  The  evils  of  such  overcrowding  are  manifest.  Bad  air  is 
the  inevitable  result,  for  such  a  swarm  of  humanity  must  make  the 
air  foul,  outdoors  as  well  as  in.  Lack  of  play  space  for  children  is 
not  the  least  of  the  evils  of  congestion.  In  old  Greenwich  Village,  a 
section  of  New  York  City,  there  were,  according  to  an  official  report 
of  1914,  but  16,000  square  feet  of  play  space,  and  24,000  children 
lived  in  the  district.  Greenwich  Village  is  on  the  lower  West  side  of 
the  city,  a  district  not  hitherto  considered  bad  enough  to  need  special 
attention,  efforts  to  secure  more  play  space  having  been  directed  to- 
wards the  lower  East  side.  In  all  our  large  cities  play,  normal, 
healthful  play  for  children,  is  out  of  the  question.  Under  such  condi- 
tions it  is  impossible  for  the  children  to  grow  up  with  strong,  healthy 
minds  and  bodies. 

The  worst  phase  of  congestion  is,  too  many  per  tenement.  In 
this  respect  our  small  cities  are  not  far  behind  the  larger  ones.  Fam- 
ilies of  four  or  five  often  live  in  one  or  two  rooms  and  take  in  two 
or  three  boarders  and  lodgers.  In  New  York  City  about  18  per  cent 
of  the  families  live  in  one  room  and  often  take  in  one  or  two  lodgers. 
In  small  tenements  of  four  or  five  rooms  there  is  no  distinction  be- 
tween bedroom,  kitchen  or  dining  room  at  night,  the  floor  of  each 
room  being  literally  covered  with  mattresses  filled  with  people  of  all 
ages  and  both  sexes.  In  the  daytime  the  mattresses  are  piled  up  in 
one  corner  of  the  rooms.     Sometimes  two  or  three  rooms  of  the  small 


38  ELEMENTS  OF  ECONOMICS 

tenements  are  rented  to  two  sets  of  lodgers,  one  set  occupying  them 
at  night  and  the  other  set  in  the  daytime,  the  day  lodgers  being 
..ight  workers,  or  tramps,  night  prowlers  and  thieves.  The  bad  air, 
the  filth,  the  indecency  under  such  conditions  can  better  be  imagined 
than  described;  but  no  one  can  imagine  the  foulness  of  the  air  in 
such  places  until  he  has  actually  stepped  from  the  open  air  into  one 
of  these  dens. 

The  lack  of  pure  air  and  sunlight  is  also  due  to  faulty  con- 
struction of  the  tenements.  Great  blocks  of  houses  are  solidly  packed 
together,  four  or  five  stories  high,  and  as  a  result  of  this  method  of 
construction  most  of  the  rooms  have  no  windows  opening  out  into  the 
broad  daylight,  but  have  windows  and  doors  opening  into  other  rooms, 
and  often  these  other  rooms  have  no  outside  door  or  window,  but 
have  windows  opening  upon  small,  narrow  air  shafts,  three  or  four 
feet  wide.  These  air  shafts  often  get  filled  at  the  bottom  with  gar- 
bage, and  windows  are  tightly  closed  to  keep  the  foul  air  from  com- 
ing into  the  rooms. 

The  filth  in  many  of  these  tenements  and  around  them  is  indes- 
cribable. Floors  are  black  with  dirt,  both  in  the  rooms  and  in  the 
hallways,  the  latter  seemingly  not  only  unwashed  but  unswept  from 
one  year's  end  to  another.  Garbage  in  the  air  shafts,  in  the  back 
yards,  in  the  alleys  and  even  in  the  streets;  rats  and  mice  and  vermin 
everywhere,  laden  with  contagious  disease;  flies  and  insects  in 
swarms  bringing  their  portion  of  dis*3ase  germs;  such  in  brief  out- 
line are  the  conditions  in  the  slums  of  our  cities,  great  and  small, 
such  conditions  as  one  would  scarcely  believe  could  exist,  unless 
tie  had  seen  them  with  his  own  eyes. 

The  general  results  of  such  conditions  are  inevitably  a  grave 
menace  to  society  as  a  whole.  These  slums  are  hotbeds  of  disease, 
vice  and  crime.  Children  are  stunted  in  mind  and  body  and  depraved 
in  morals.  Deprived  of  God's  free  air  and  sunlight,  with  no  chance 
even  in  the  daytime  to  play  as  normal  children  should,  housed  among- 


ELEMENTS  OF  ECONOMICS  39 

vagabonds,  beggars  and  thieves — for  such  are  many  of  the  lodg-ars — 
filth,  disease,  ugliness  everywhere,  it  is  no  wonder  that  90  per  cent 
(the  estimate  of  Jacob  Riis)  of  our  children  in  reformatories  come 
from  the  slums.  It  would  be  far  wiser  and  more  humane  for  society 
to  reform  the  dens  whence  come  these  poor  unfortunates.  As  Riis 
humorously  put  it,  we  should  recognize  the  fact  that  we  are  our 
brother's  keeper,  rather  than  his  jail  keeper. 

23.  CAUSES  OF  THESE  CONDITIONS.  Why  will  human  be- 
ings live  in  such  surroundings?  There  are  many  reasons,  five  of 
which  are  especially  emphasized  by  social  workers,  (1)  low  wages, 
(2)  drunkenness,  (3)  laziness,  (4)  factories  congested  in  certain 
parts  of  cities,  (5)  the  low  standard  of  many,  especially  foreigners, 
coupled  with  an  intense  struggle  to  save  from  an  exceedingly  low 
wage.  Not  all  of  the  five  causes  would  apply  to  the  same  people, 
but  two  or  more  might  sometimes  apply.  The  relative  importance 
of  these  causes  is  not  easy  to  determine,  but  wage  statistics  would 
indicate  that  low  wages  is  the  chief  cause.  According  to  the  latest 
available  data,  published  both  by  the  State  bureaus  of  labor  and  by 
the  United  States  government,  about  one-tenth  of  the  adult  male 
workers  in  this  country  earn  less  than  $325.00  a  year,  while  half  our 
wage  earners  get  less  than  $500.00  a  year.  Any  one  can  readily  prove 
from  his  own  knowledge  without  much  investigation  that  a  family  of 
four  or  five,  the  average  size  of  a  family,  could  not  possibly  live  in 
decency  on  three  hundred  and  twenty-five  dollars  a  year,  and  with  five 
hundred  dollars  a  year  the  struggle  for  a  decent  living  would  be  a 
hard  one.  With  prices  such  as  have  prevailed  for  the  last  ten  years, 
a  family  of  five  could  not  provide  themselves  with  food  for  less  than 
three  hundred  dollars  a  year,  and  it  would  have  to  be  the  plainest  of 
food  at  that.  A  decent  house  or  flat  of  four  rooms  would  cost  on  the 
average  not  less  than  one  hundred  fifty  dollars  a  year,  and  clothing 
of  the  plainest  kind  would  cost  not  less  than  fifty  dollars  a  year. 
Thus  it  appears  that  these  three  items  alone  amount  to  more  than 
half  our  laborers  earn,  counting  only  the  head  of  the  family  as  a 


40  ELEMENTS  OF  ECONOMICS 

bread  winner.  The  results  are  inevitable.  In  order  to  live  at  all,  peo- 
ple must  crowd  into  the  worst  tumble  down  shacks  obtainable  and 
often  the  mother  and  little  children  must  become  wage  earners,  to 
the  very  great  injury  of  both.  Many,  made  desperate  by  such  a 
hopeless  struggle  for  mere  existence,  seek  to  drown  their  troubles 
with  strong  drink  and  make  their  condition  worse.  Thus  drunkenness 
is  often  the  result  of  poverty  rather  than  the  cause;  and  some  of  our 
social  workers  assert  that  drunkenness  is  more  often  the  result  than 
the    primary  cause  of  poverty. 

Pure  laziness  no  doubt  is  a  cause  of  these  conditions  in  many 
cases,  especially  of  the  filth,  for.. water  is  easy  to  get  and  a  little 
work  would  keep  things  clean.  In  many  cases  the  income  is  suffi- 
cient, but  foolish  expenditure,  including  the  drink  bill,  does  not  leave 
enough  for  necessities.  Then,  too,  factories  are  often  congested  in 
one  part  of  the  city,  and  in  order  to  be  near  their  work,  laborers 
crowd  into  the  tenements,  and  since  rents  are  usually  high  in  the 
thickly  settled  parts  of  a  city,  intense  overcrowding  is  necessary  to 
bring  rents  down  to  a  reasonable  figure.  Finally,  large,  portions  of 
our  immigrants  have  an  exceedingly  low  standard  of  living  but  are 
anxious  to  lay  up  something  out  of  their  pittance  of  an  income,  in 
order  to  return  to  Europe  and  live  in  comfort  the  remainder  of  their 
days.  Hence,  they  are  willing  while  here  to  put  up  with  almost  any 
condition,  if  they  can  only  save. 

24.  REMEDIES.  No  remedy  of  any  evil  can  be  effective  unless 
it  removes  the  causes  of  the  evil.  Therefore,  if  we  would  find  any  ef- 
fective remedy  for  bad  housing  conditions  we  must  discover  some 
way  of  removing  the  causes  of  such  conditions.  From  the  nature  of 
the  case  no  one  remedy  would  remove  all  the  causes,  within  a  reas- 
onable length  of  time.  The  most  fundamental  of  all  remedies,  and 
the  one  that  will  go  farthest  in  removing  the  different  causes  of  bad 
housing  conditions,  is  to  give  a  living  wage.  This  would  remove  a 
large  part  of  the  cause  for  drunkenness  and  in  time,  that  is,  in  the 


ELEMENTS  OF  ECONOMICS  41 

course  of  a  few  generations,  the  natural  tendency  of  man  upward  will 
reduce  the  problem  from  the  stupendous  proportions  it  now  assumes 
to  one  of  small  dimensions.  But  how  to  secure  the  living  wage  is 
the  difficult  problem.  But  however  difficult,  this  result  must  be  at- 
tained or  all  other  remedies  combined  must  utterly  fail,  except  pos- 
sibly that  cleanliness  might  be  attained  in  some  degree  by  judicious 
help  and  advice  of  wise  friends  of  these  unfortunate  people. 

But  how  shall  wages  be  raised  to  a  living  standard?  Some 
■countries  are  adopting  a  minimum  wage  law,  and  about  a  dozen 
American  States  have  adopted  such  a  law,  but  laws  in  this  country 
apply  only  to  women  and  children,  who  are  not  the  chief  bread- 
winners; and  these  laws  do  not  therefore  touch  the  heart  of  the 
problem.  If  such  laws  applied  to  men  also  they  would  be  more  ef- 
fective in  enabling  the  working  classes  to  live  in  decency.  Low 
wages,  however,  are  caused  by  an  oversupply  of  unskilled  labor  and 
inefficiency.  A  minimum  wage  law  alone  would  not,  except  after  a 
long  time  at  least,  and  through  the  slow  rise  of  the  standard  of  liv- 
ing and  the  adjustment  of  the  supply  of  labor  to  the  demand,  lessen 
the  oversupply  of  labor;  nor  would  it  increase  its  efficiency,  unless 
the  state  offered  more  opportunity  for  industrial  education.  The 
most  important  cause  of  our  present  oversupply  of  unskilled  laborers 
is  immigration.  The  logical  remedy  therefore  is  a  restriction  of  that 
class  of  immigrants.  We  would  not  need  to  prohibit  immigration, 
but  to  exclude  a  much  greater  number  of  the  less  desirable  sort. 
Th-e  most  authoritative  recommendation  for  a  considerable  restriction 
of  immigration  comes  from  the  recent  report  of  the  Federal  Immi- 
gration Commission,  a  commission  composed  of  some  of  the  leading 
economists  and  statesmen  of  the  country,  appointed  especially  to  in- 
vestigate our  immigration  problems.  A  bill  intended  to  decrease  the 
number  of  immigrants  and  raise  the  standard  of  those  admitted  has 
three  times  passed  both  houses  of  Congress,  but  was  each  time  de- 
feated by  the  presidential  veto,  the  first  being  vetoed  by  President 
Cleveland,  the  second  by  President  Taft  and  the  third  by  President 


42  ELEMENTS  OF  ECONOMICS 

Wilson,  the  main  objection  in  all  cases  being  to  the  literacy  test. 

In  order  to  increase  efficiency  of  laborers,  more  opportunities 
should  be  given  for  young  men  to  get  vocational  training.  As  we 
consider  the  problem  later  under  the  head  of  problems  of  production, 
we  mention  it  here  merely  to  make  our  remedies  for  low  wages  com- 
plete. 

Another  helpful  remedy  seeks  to  reduce  unemployment  by  es- 
tablishing employment  bureaus  by  cities,  by  the  states  and  by  the 
national  government.  Often  laborers  are  wanted  in  different  part^ 
of  the  country,  but  without  public  employment  bureaus,  well  or- 
ganized and  connected  all  over  the  country,  those  desiring  help 
and  those  desiring  work  do  not  get  together.  In  response  to 
this  need  several  states  and  many  cities  have  established  em- 
ployment bureaus,  and  the  National  Department  of  Labor  is 
now  cooperating  with  the  Post  Office  Department  to  bring  the 
manless  job  and  the  jobless  man  together.  If  all  these  var- 
ious measures,  the  minimum  wage  laws,  restriction  of  immi- 
gration, industrial  training,  better  distribution  of  laborers  by  em- 
ployment bureaus,  could  be  secured,  we  would  be  on  the  road 
to  a  solution  of  the  housing  problem. ' 

But  other  remedies  are  needed  to  help  bring  about  results  more 
effectively  and  more  quickly.  We  need  a  wiser  economy  in  spending. 
Strong  drink  should  be  eliminated.  And  greater  economy  in  the 
home  would  make  wages  go  farther.  Many  poor  people  buy  baker's 
bread,  which  costs  twice  as  much  as  it  would  to  bake  it  at  home.  In 
many  cities  charitable  organizations  are  employing  trained  house- 
keepers to  instruct  the  poorer  classes  in  more  economical  methods 
of  housekeeping. 

A  third  class  of  remedies  needed  includes  those  which  seek  to  re- 
form the  tenement.  Many  cities  have  tenement-house  laws  which 
prescribe  the  conditions  as  to  light,  ventilation,  plumbing,  and  other 
provisions  which  should  make  the  tenements  more  habitable.     Greedy 


ELEMENTS  OF  ECONOMICS  43 

landlords  have  fought  such  legislation  most  vigorously,  as  they  do 
not  wish  to  lose  any  of  the  twenty  or  thirty  per  cent  which  they 
often  make  on  their  investments.  But  in  a  few  of  the  large  cities 
much  has  been  done  to  improve  the  new  tenements  that  are  being 
built  and  some  of  the  worst  dens  have  been  condemned  and  torn 
down.  Much  remains  to  be  done  yet  along  these  lines;  in  fact,  taking 
the  country  over,  the  "battle  with  the  slums"  is  not  half  finished, 
and  in  most  of  our  smaller  cities  the  problem  has  not  been  attacked. 
But  even  where  fairly  good  tenement-house  laws  have  been  enacted, 
those  relating  to  ovet'crowding  in  tenements  are  wholly  ineffective. 
After  a  generation  of  struggle  to  prevent  overcrowding  in  a  few  of 
our  great  cities  conditions  are  worse  now  than  ever  before,  because 
the  tendency  to  overcrowd  is  so  strong  that  laws  to  prevent  it  are  a 
dead  letter.  In  the  smaller  cities  this  evil  is  just  beginning  to  be 
serious,  owing  to  the  recent  coming  of  the  immigrant  to  the  smaller 
cities  and  the  development  of  manufacturing  in  them.  European 
cities  attack  the  problem  by  building  municipal  tenement-houses 
which  are  rented  to  working  men  at  a  low  rate,  and  inducements  are 
offered  the  renter  to  become  the  owner  of  his  home  by  paying  for  it 
on  the  long-time  installment  plan.  America,  however,  is  as  yet  too 
individualistic  in  its  theories  to  adopt  this  plan.  But  if  all  the  other 
plans  here  suggested  could  be  adopted  we  could  make  some  headway 
against  this  vast  housing  problem  which  is  becoming  more  serious 
every  year  and  which  threatens  greatly  to  interfere  with  our  progress 
towards  a  higher  and  a  nobler  civilization. 

25.  THE  LIQUOR  PROBLEM.  Scarely  less  important  than 
housing  reform  is  the  liquor  problem,  and  in  some  respects  the  latter 
is  the  larger  problem  of  the  two,  partly  because  it  affects  more  peo- 
ple and  partly  because  a  very  large  element  of  our  population  is 
fighting  against  any  effective  reform.  The  first  great  fact  that 
confronts  us  as  we  view  the  situation  is  the  enormous  size  of  our 
drink  bill.  In  1912  the  people  of  the  United  States  consumed  over 
two  billion  gallons  of  alcoholic  liquor  at  a  cost  to  the  consumer  of 


44  ELEMENTS  OF  ECONOMICS 

over  two  billion  dollars,  the  per  capita  consumption  being  twenty-two 
gallons,  at  a  cost  of  about  twenty  dollars.  We  spend  more  for  strong 
drink  each  year  than  the  total  value  of  all  the  hogs  and  cattle  in  the 
country,  more  than  twice  the  value  of  our  wheat  crop,  more  than  the 
vcost  of  all  grades  of  our  government,  and  more  than  three  times  as 
much  as  we  are  spending  for  education.  When  a  nation  spends 
three  times  as  much  for  strong  drink  as  it  does  for  education,  when 
more  education  is  much  needed,  there  is  something  radically  wrong 
with  its  estimate  of  the  relative  value  of  things.  But  ths  outlook 
is  encouraging.  The  maximum  per  capita  consumption  was  reached 
about  1896  or  1897,  and  since  that  time  the  tide  has  risen  no  higher 
and  the  indications^  are  that  during  the  last  two  years  it  has  receded 
a  little.  The  liquor  interests  are  becoming  somewhat  alarmed  at 
the  outlook,  as  they  fear  that  the  great  temperance  wave  now  sweep- 
ing over  the  country  will  in  time  destroy  them. 

The  evil  effects  of  alcohol  are  well  known  and  there  is  little  ex- 
cuse for  a  people  being  ignorant  of  those  effects.  Even  the  drunkard 
himself  knows  in  his  sober  moments  that  excessive  use  of  alcohol 
weakens  him  mentally,  physically  and  morally.  Drunkenness  is  a 
very  powerful  factor  in  helping  fill  our  jails,  penetentiaries,  alms- 
houses, and  asylums.  According  to  the  report  of  the  Mass.  commis- 
,sion  to  investigate  drunkenness,  alcohol  was  the  cause  of  67  per  cent 
of  the  commitments  to  prison  during  the  year  ending  Sept.  30,  1913. 
Even  moderate  drinking  is  now  considered  by  all  scientific  men  as 
detrimental.  Says  Bishop  Lawrence,  "The  time  has  passed  when 
any  intelligent  person  claims  that  strong  drink  makes  a  man  m-ore 
efficient.  Industrial  efficiency  is  driving  the  drinking  man,  even  the 
rather  moderate  drinking  man,  to  the  wall."  Many  employers  of 
labor,  especially  the  great  corporations,  absolutely  forbid  their  em- 
ployees the  use  of  alcoholic  liquor,  even  in  moderate  quantities,  not 
only  when  on  duty  but  when  off  duty,  and  an  infraction  of  the  rule 
leads  to  dismissal.  These  employers  of  labor  are  not  temperance 
fanatics,  but  they  know  from  experience  that  even  moderate  drinking 


ELEMENTS  OF  ECONOMICS  45 

lessens  the  working  ability  of  their  men.  Says  President  Eliot  of 
Harvard  University,  "The  alcoholism  of  the  white  race  must  be  over- 
come or  that  vice  with  the  licentiousness  that  it  provokes  will  over- 
come  the  race." 

26.  SOLUTION  OF  THE  PROBLEM.  The  temperance  forces 
seem  to  rely  largely  on  closing  the  saloons  as  a  sufficient  and  proper 
remedy.  Their  opponents  claim  that  society  has  no  moral  right  to 
forbid  a  man  from  drinking,  and  that  the  destruction  of  the  liquor 
business  would  be  economically  injurious  to  society  as  a  whole.  Or- 
ganized society  exists  for  the  benefit  of  the  people.  If  any  industry 
is  proven  to  be  injurious  to  society,  that  is,  to  the  individuals  com- 
posing that  society,  it  is  not  only  the  right  but  the  duty  of  society 
to  suppress  that  business.  A  man  has  no  moral  right  to  do  anything 
that  injures  the  other  members  of  the  community.  The  saloon  busi- 
ness has  been  condemned  by  ages  of  experience,  and  if  society  thinks 
the  business  injurious  it  has  a  right  to  suppress  that  business.- 
Moreover,  an  individual  has  no  moral  right  to  do  that  which  injures 
himself  and  incapacitates  him  for  performing  his  economic  and  polit- 
ical duties.  Man  is  the  natural  bread  winner,  and  he  has  no  moral 
right  deliberately  to  lessen  his  power  to  support  a  family,  nor  has  he  a 
right  to  weaken  his  own  mental  and  moral  nature  and  thus  unfit 
himself  for  citizenship.  And  if  a  man  is  too  weak  to  resist  the 
temptation  to  destroy  himself,  it  is  the  duty  of  society  to  save  him 
from  destruction,  for  we  are,  by  every  law,  human  and  divine,  our 
brother^s    keeper. 

The  friends  of  the  saloon  claim  that  the  destruction  of  the  liquor 
business  would  injure  industry  generally.  First,  they  urge,  all  those 
engaged  in  the  business  would  be  thrown  out  of  work.  That  would 
injure  merchants  and  producers  who  had  been  furnishing  them  with 
goods.  Then  the  demand  for  grain  and  other  materials  consumed  in 
the  production  of  liquor  would  be  destroyed,  and  a  vast  injury  would 
result  to  business  generally.  This  argument  is  exceedingly  shallow 
and  perfectly  fallacious.     The  results  indicated  would  be  merely  tern- 


46  ELEMENTS  OF  ECONOMICS 

porary,  until  society  got  itself  adjusted  to  a  new  economic  order  of 
consumption.  The  argument  of  the  friends  of  the  saloon  overlooks 
the  great  laws  of  consumption  and  assumes  that  if  men  should  cease 
to  drink  liquor  their  powers  of  consumption  of  other  things  would 
remain  stationary.  The  simple  fact  is  that  if  the  consumption  of 
liquor  is  cut  off,  demand  for  other  things  will  immediately  increase. 
Those  that  now  go  hungry  and  half  clothed  because  of  the  saloon 
business  would  be  better  fed  and  better  clothed.  The  suppression  of 
the  liquor  business  would  not  diminish  manVs  capacity  for  consump- 
tion, but  a  new  and  better  consumption  would  spring  up.  Thus 
those  temporarily  thrown  out  of  employment  by  the  closing  of  the 
saloons  would  find  other  employment  where  they  could  help  supply 
society  with  things  beneficial  to  it  rather  than  harmful.  But  society 
should  give  needed  aid  to  those  temporarily  thrown  out  of  work  and 
it  should  compensate  owners  of  property  made  valueless  by  de- 
struction of  the  liquor  business. 

But  the  suppression  of  the  saloon  is  not  enough.  The  saloon  is 
the  poor  man^s  club.  Men  must  have  amusement,  and  society  should 
take  upon  itself  to  provide  places  of  amusement  of  a  kind  that  would 
elevate  and  not  destroy.  Society  already  has  at  its  command,  es- 
pecially in  the  cities,  places  that  can  be  made  into  social  centers, 
and  these  places  are  its  schoolhouses  that  have  as  yet  only  been 
half  utilized.  By  proper  effort  recreation  and  amusement  could  be 
provided  that  would  attract  those  who  now  make  the  saloon  their 
social   center. 

27.  EXTRAVAGANCE  OF  THE  RICH.  It  is  a  common,  al- 
most universal,  belief  that  the  extravagance  of  the  rich  is  a  benefit 
to  the  poor.  The  thought  of  the  average  person  on  the  matter  runs 
as  follows;  If  the  rich  keep  a  great  many  servants  for  menial  work, 
which  results  in  no  concrete  goods,  there  will  be  a  greater  demand 
for  labor,  because  somebody  must  labor  to  produce  the  goods  which 
society  demands.  If  the  rich  spend  lavishly  in  dress,  keep  half  a 
dozen    automobiles,    take    frequent    and    expensive    trips    abroad;    all 


ELEMENTS  OF  ECONOMICS  47 

this  creates  a  demand  for  labor,  and  thus  increases  wages. 

This  reasoning  looks  sound  upon  a  very  superficial  view.  But  it 
is  fallacious.  If  the  labor  that  is  employed  in  supplying  this  super- 
abundance of  luxuries  for  the  rich  were  directed  towards  the  pro- 
duction of  things  needed  by  the  masses,  there  would  be  a  double  gain 
to  the  laborers.  In  the  first  place,  things  consumed  by  the  masses 
would  not  be  so  high  in  price,  because  they  would  not  be  so  scarce. 
Some  of  the  necessities  being  cheaper,  more  money  would  be  spent 
to  satisfy  culture  wants.  This  in  the  second  place  would  lead  to  in- 
creased demand  for  labor,  and  wages  would  be  higher.  Let  us  look 
at  it  from  another  point  of  view.  As  it  is  now  a  large  portion  of  the 
labor  and  capital  of  the  country  is  directed  towards  the  production 
of  high  priced  luxuries  of  the  rich.  If  a  part  of  this  labor  and  capital 
were  directed  towards  supplying  goods  such  as  the  masses  need,  the 
wants  of  the  masses  would  be  more  fully  supplied. 

The  extravagance  of  the  rich  is  harmful  to  society  in  another 
way,  as  pointed  out  above,  since  it  sets  a  bad  example  which  others 
strive  to  imitate.  Thus  it  sets  the  middle  and  lower  classes  to  strug- 
gling after  material  luxuries  instead  of  intellectual  culture  that  lies 
within  the  reach  of  all,  if  they  would  revise  their  estimate  of  the 
relative  value  of  things. 


48  ELEMENTS  OF  ECONOMICS 

CHAPTER  IV. 
The  Factors  of  Production. 

28.  PRODUCTION  DEFINED.  Production  is  the  creation  of- 
utilities.  It  will  be  recalled  that  there  are  four  kinds  of  utilities,  ele- 
mentary utility,  form  utility,  time  utility,  and  place  utility.  Hence,, 
production  includes  not  merely  the  making  of  materials  and  finished 
products,  but  it  also  includes  all  transportation  enterprises  that  give 
place  utility  as  well  as  all  mercantile  business  which  also  gives  time 
and  place  utility. 

Mere  speculators,  however,  who  buy  up  goods  in  large  quantities 
to  hold  them  for  an  advance  in  price  are  not  producers.  They  render 
no  useful  service  to  society.  Just  as  much  work  must  be  devoted  to 
the  distribution  of  such  goods  to  the  consumer  after  these  specula- 
tors have  sold  the  goods  to  the  regular  dealers  as  before  the  specula- 
tors bought  them  up.  All  persons  who  gain  a  living  by  such  means- 
are  mere  parasites  upon  society.  All  those  connected  with  stock  ex- 
changes who  are  not  performing  the  useful  service  of  selling  stocks 
and  bonds  to  investors,  but  merely  manipulating  the  stock  market  so 
as  to  enhance  their  values,  are  among  these  social  parasites. 

29.  THE  THREE  FACTORS  OF  PRODUCTION.  There  are 
three  factors  of  production,  man,  nature,  and  capital.  Nature  in- 
cludes lands,  minerals,  and  all  physical  and  chemical  forces.  Capital 
includes  all  goods,  made  by  man,  that  aid  in  production.  The  dis- 
tinction between  capital  and  consumers*  goods  must  be  kept  clearly 
in  mind.  Consumers*  goods  include  all  commodities  that  satisfy  our 
wants  and  that  are  in  shape  for  final  consumption.  Without  capital, 
man  would  stir  the  ground  with  his  hands,  plant  the  seed  with  his 
hands,  and  tend  it  with  his  hands.  He  would  catch  fish  from  the 
streams  and  lakes  with  his  hands  and  with  his  hands  twist  into 
thread  fibers  of  plants  and  weave  them  into  garments.  Needless  to 
say,  this  direct  method  of  production  would  be  very  inefficient.  With 
tools  and  machinery,  or  by  the  indirect  or  roundabout  method,  man's 


ELEMENTS  OF  ECONOMICS  49 

labor  is  more  effective.  It  is  indirect  or  roundabout  because  man  first 
makes  his  tools  and  machines  and  with  these  makes  other  tools  and 
machines,  and  finally  makes  the  commodities  for  final  consumption. 
Thus  capital  is  one  of  the  greatest  aids  to  civilization.  Without 
capital  man  would  forever  remain  a  savage,  for  all  his  energies 
would  be  used  up  in  supplying  himself  with  necessities. 

A  distinction  should  be  made  between  private  capital  and  social 
capital.  Private  capital  is  merely  property  from  which  a  man  de- 
rives an  income;  social  capital  enables  man  to  produce  more  goods 
than  he  otherwise  could  produce.  A  dwelling  house  rented  to  a  tenant 
is  private  capital;  but  it  is  not  social  capital.  A  dwelling  house  is  to 
be  classed  as  consumers*  goods,  just  as  much  as  food  or  clothing. 
And  the  fact  that  the  houses  are  rented  rather  than  occupied  by 
those  who  own  them  does  not  increase  the  productive  forces  of 
society. 

Land  may  be  classified  as  private  capital,  since  all  business  men 
and  farmers  reckon  their  land  as  a  part  of  their  capital.  But  land  is 
not  to  be  classified  as  social  capital,  not  merely  because  man  did  not 
make  it,  but  for  a  much  more  important  reason.  That  reason  is  that 
income  from  land  is  determined  by  a  different  law  from  that  which 
governs  income  from  capital.  As  a  country  becomes  more  thickly 
populated  and  capital  becomes  more  abundant,  the  rate  of  interest 
declines;  while  under  the  circumstances  stated,  income  from  lands 
increases.  Hence  the  science  of  economics,  which  tries  to  explain 
the  phenomena  of  the  business  world,  must  disregard  the  practice  of 
business  men  in  this  respect  and  put  land  and  other  natural  agents 
in  a  class  by  themselves,  in  order  to  discover  the  law  that  governs 
the  income  from  these  natural  agents. 

30.  CLASSIFICATION  OF  CAPITAL.  Capital  may  for  con- 
venience be  divided  into  four  classes,  considering  the  way  in  which 
it  aids  in  the  productive  process.  These  classes  are,  (1)  the  tools 
and  machines  we  work  with,  (2)  improvements  in  the  soil,  which 
help  nature  to  do  her  work  better  and  thus  render  our  labor  more 


50  ELEMENTS   OF   ECONOMICS 

effective,  (3)  materials  we  work  upon,  and  (4)  finished  consumers'" 
goods  in  the  hands  of  producers  and  merchants.  The  first  class  in- 
cludes, besides  tools  and  machines  in  a  narrow  sense,  horses,  fences,, 
buildings,  and  many  other  things  that  make  our  work  more  effective 
than  when  the  direct  process  of  production  is  used.  The  second  class 
includes  fertilizers,  drains,  and  other  improvements  that  increase 
the  productive  powers  of  the  soil.  A  close  analysis  shows  that  both 
ths  first  and  second  classes  of  capital  make  our  labor  more  effective 
for  much  the  same  reason,  namely,  they  harness  the  forces  of  nature 
and  make  them  v/ork  for  us.  The  materials  we  work  upon  do  not 
directly  aid  in  production  but  are  merely  the  passive  instruments  in 
the  productive  process.  Finished  consumers'  goods  in  the  hands  of 
producers  and  dealers  are  classed  as  capital  simply  because  they  are 
in  the  last  stage  of  the  productive  process,  time  and  place  utility 
being  added  to  them  in  passing  from  the  producer  to  the  consumer. 
Both  the  third  and  fourth  classes  of  capital  are  passive,  and  do  not 
directly  make  our  work  more  efficient,  and  the  fourth  is  metely  a  re- 
sult of  division  of  labor. 

Another  classification  of  capital,  based  upon  durability,  is  that 
of  fixed  and  circulating  capital.  Fixed  capital  includes  those  forms 
of  capital  that  are  fixed  or  limited  to  one  or  at  most  to  a  few  uses. 
A  railway  locomotive  can  be  used  only  in  transporting  goods  and 
people,  and  the  roadbed  and  cars  are  also  devoted  to  one  use.  A  fac- 
tory building  can  be  used  economically  for  nothing  but  a  factory, 
though  it  might  be  transformed  from  one  kind  of  factory  to  another. 
Tools  and  machinery  of  all  kinds  are  limited  in  the  uses  to  which 
they  may  be  put;  but  the  degree  of  limitation  varies  widely.  Axes, 
saws,  hammers,  and  such  tools,  can  be  used  in  building  all  sorts  of 
things,  while  a  lathe  in  a  machine  factory  has  a  much  more  limited 
use.  The  term,  specialized  capital,  is  often  used  instead  of  fixeC 
capital  and  means  practically  the  same  thing,  that  is,  its  use  is  lim- 
ited or  specialized. 

Circulating  capital  is  that  which  is  used  up  in  a  single  process, 


ELEMENTS   OF   ECONOMICS  51 

^s  the  coal  in  the  furnace,  the  thread  of  which  the  cloth  is  made,  the 
lumber  which  enters  into  all  kinds  of  things.  But  a  better  term  than 
circulating  is  free,  which  indicates  that  the  uses  to  which  the  capital 
may  be  put  are  many.  The  degree  of  freedom  in  use  is  however 
widely  different  for  different  things,  as  will  readily  be  seen  by  a 
moment's  reflection.  It  will  be  observed  that  fixed  or  specialized 
capital  practically  corresponds  with  the  first  two  classes  above,  tools 
and  improvements  in  the  soil,  and  that  circulating  or  free  capital 
corresponds  roughly  with  the  materials  we  work  upon.  The  fourth 
of  the  above  classes,  consumers'  goods  in  the  hands  of  producers 
and  dealers,  would  seem  to  belong  under  specialized  capital,  since 
the  use  of  such  goods  is  quite  limited.  Clothing,  for  -example,  can- 
not be  used  for  any  purpose  but  to  wear. 

The  latter  classification  of  capital  suggests  facts  of  great  in- 
dustrial importance.  For  example,  if  too  much  capital  is  invested  in 
fixed  or  specialized  forms  of  certain  kinds  it  may  lead  to  great  in- 
dustrial disturbances.  In  1837  the  great  crisis  resulted  from  in- 
vesting too  much  capital  in  canals,  turnpikes  and  railroads,  and  most 
of  our  other  panics  were  due  to  similar  causes.  People  borrowed 
money  or  creditjargely  of  banks,  in  order  to  build  the  roads  or  canals, 
more  were  built  than  were  then  needed,  the  enterprises  did  not  pay 
dividends,  the  banks  that  advancd  the  money  and  credit  were  ruined, 
and  with  their  fall  came  the  ruin  of  many  other  business  houses,  and 
so  the  mischief  spread  all  over  the  country,  carrying  sorrow  into 
hundreds  of  thousands  of  homes. 

31.  THE  INCREASE  OF  CAPITAL.  The  process  of  accumula- 
tion of  capital  involves  three  steps,  saving  from  current  income,  in- 
vesting, which  means,  in  reality,  deciding  what  is  to  be  produced, 
and  the  production  of  capital  goods.  Some  writers  use  the  word 
waiting  in  this  connection,  which  calls  attention  to  the  fact  that  a 
certain  interval  must  elapse  between  the  time  of  saving  and  the 
final  profits  which  result.  Waiting,  however,  is  not  a  step  in  the 
process,  but  only  incidental  to  the  process.     Other  writers  use  the 


52  ELEMENTS   OF   ECONOMICS 

term  abstinence  instead  of  waiting,  the  term  abstinence  calling  at- 
tention to  the  self-denial  and  hardship  involved  in  foregoing  present 
consumption  with  the  hope  of  having  more  for  consumption  in  the  ' 
future  than  one  would  have  without  the  saving  and  waiting.  Some 
writers,  especially  the  Socialists,  deny  that  there  is  any  pain  or  hard- 
ship involved  in  saving  and  waiting,  and  they  cite  in  proof  of  their 
contention  the  pleasure  involved  in  anticipating  the  future  increase 
of  capital,  and  they  also  contend  that  the  rich  capitalists  experience 
no  hardship  in  the  process.  No  doubt  those  who  are  thrifty  and  sav- 
ing take  pleasure  in  providing  for  the  future,  and  it  is  doubtless  true 
that  the  rich  do  not  have  to  deprive  themselves  of  many  luxuries  in 
the  process.  But  it  is  not  true  that  all  the  saving  is  done  by  the  rich. 
A  very  large  portion  of  the  savings  comes  out  of  the  meager  incomes 
of  those  who  must  forego  many  things  they  would  like  to  have.  The 
practical  point  involved  in  the  dispute  is  that  those  who  hold  to  the 
abstinence  idea  justify  the  payment  of  interest  on  capital  on  the 
ground  that  interest  is  a  reward  for  the  pain  involved  in  saving  and 
waiting.  The  Socialists  claim  that  since  no  pain  is  involved,  interest 
on  capital  is  not  justifiable.  We  shall  return  to  this  point  in  a  sub- 
sequent chapter. 

The  forces  governing  the  rate  of  accumulation  of  capital  are  two, 
the  productivity  of  industry  and  the  habits  of  the  people.  If  a  coun- 
try is  poor  in  natural  resources  and  the  people  lack  energy,  little 
will  be  produced  from  which  to  save,  even  though  the  people  are 
saving  in  their  habits.  And  even  if  the  people  are  both  energetic 
and  saving,  capital  cannot  be  accumulated  rapidly  if  the  country  is 
poor  in  natural  resources.  But  with  rich  natural  resources  and  an  in- 
dustrious and  saving  people,  wealth  and  capital  will  accumulate 
rapidly.  Again,  nature  may  be  favorable,  and  the  people  energetic, 
but  if  they  spend  it  all  in  riotous  living  like  the  prodigal  son,  there 
will  be'  little  wealth  and  little  capital.  These  three  things,  there- 
fore, the  natural  resources,  the  degree  of  energy  of  the  people,  and 
their  habits  as  to  saving  are  the  main  factors  determining  the  rate 


ELEMENTS  OF  ECONOMICS  53 

of  increase  of  capital. 

Economists  a  generation  ago  usually  laid  it  down  as  a  law  that 
the  rate  of  accumulation  of  capital  depends  upon  the  rate  of  interest 
and  that  as  the  rate  of  interest  declines  the  rate  of  accumulation  of 
capital  declines.  But  later  economists  have  pointed  out  that  the  lat- 
ter part  of  the  law  is  not  necessarily  true.  The  motive  for  saving  is 
a  more  decisive  factor  than  the  rate  of  interest.  If,  for  example, 
the  motive  be  to  save  for  old  age,  the  person  saving  hoping  to  live 
from  the  interest  of  his  capital,  a  lowering  of  the  rate  of  interest 
would  increase  savings,  because  it  would  take  a  larger  amount  to 
keep  one  in  old  age.  If,  however,  the  savings  are  from  the  incomes 
of  the  rich,  lowering  the  rate  of  interest  would  decrease  the  rate  of 
saving,  since  the  rich  would  continue  to  spend  about  the  usual 
amount  on  pleasure  and  luxuries  and  less  would  be  left  for  invest- 
ment. Hence,  a  variety  of  circumstances  would  determine  whether 
or  not  lowering  the  rate  of  interest  would  increase  or  decrease  the 
rate  of  saving. 

32.  THE  INCREASE  OF  LABOR— THE  LAW  OF  MALTHUS. 
Land  cannot  be  increased,  hence  we  need  not  consider  the  increase  of 
that  factor.  The  increase  of  labor,  however,  is  of  vital  concern.  The 
increase  of  labor  means  the  same  as  the  increase  of  population,  and 
the  law  of  increase  of  population  was  worked  out  about  a  hundred 
years  ago  by  an  English  economist  by  the  name  of  Robert  Malthus, 
and  the  law  of  population  is  known  as  the  Malthusian  Law.  This 
law  is  that  population  has  a  natural  tendency  to  increase  faster  than 
the  food  supply,  unless  checked  by  wars,  disease,  famine  or  what 
Malthus  called  moral  restraint,  by  which  he  meant  late  marriages. 

The  proof  of  this  law  is  abundant.  In  this  country  in  the  colon- 
ial days  population  often  increased  so  fast  that  it  doubled  every  seven- 
teen or  eighteen  years,  not  counting  immigration.  During  the  last 
hundred  and  fifty  years  the  population  of  this  country  has  about 
doubled  every  twenty-five  years.  Germany,  an  old  country,  has 
doubled  its   population  in  the  last  forty  years,   under  the   stimulus 


54  ELEMENTS   OF   ECONOMICS 

of  the  great  industrial  development  which  she  has  undergone,  and 
she  has  in  the  meantime  sent  millions  of  her  people  into  other  parts 
of  the  world.  Numerous  examples  might  be  given  from  various  coun- 
tries to  prove  that  where  means  of  subsistence  allows,  population 
will  double  itself  every  twenty  or  twentj-five  years  at  most.  At  the 
latter  rate  there  would  be  in  the  United  States,  not  including  Alaska, 
in  four  hundred  years  from  now  twenty  persons  to  every  square  rod 
of  ground  in  the  country,  and  in  another  century  after  that  there 
would  not  be  standing  room.  No  proof  is  needed  to  show  that  the 
food  supply  would  run  short  long  before  that  time.  In  India  and 
China  the  population  has  long  been  stationary  because  of  a  lack  of 
means  of  subsistence,  and  starvation  is  one  of  the  principle  means  in 
those  countries  that  keeps  the  population  from  further  increase. 

The  law  of  Malthus  does  not  imply  that  the  population  must  be 
kept  down  by  starvation.  But  it  does  mean  that  if  wars,  disease, 
and  famine  do  not  keep  the  population  within  the  limits  of  the  food 
supply,  starvation  will  be  the  force  limiting  further  increase,  at 
some  future  time,  and  that  not  very  far  distant,  unless  the  great 
majority  of  young  men  delay  marriage  until  their  income  is  suf- 
ficient to  enable  them  to  bring  up  a  family.  Later  marriages  would 
result  in  smaller  families,  and  thus  the  population  would  be  checked 
and  the  standard  of  living  could  be  maintained  or  even  raised.  A 
young  man  who  enters  the  marriage  relationship  and  has  a  large  fam- 
ily of  children  while  he  has  nothing  to  support  a  family  upon  except 
his  wages,  and  while  his  wages  are  too  low  to  support  a  large  family 
properly,  not  only  violates  common  sense,  but  he  is  an  enemy  of  the 
race,  since  such  a  course  pursued  by  all  would  inevitably  endanger 
the  welfare  of  the  race.  A  high  standard  of  civilization  is  more  im- 
portant than  vast  numbers.  On  the  other  hand,  the  rich  who  refuse 
to  bear  children  that  they  may  pursue  their  round  of  pleasures  with- 
out the  burden  of  rearing  children,  commit  a  sin  against  society,  not 
only  because  they  !refuse  to  bear  th-eir  share  of  the  burdens  of  keep- 
ing up  the  race,  but  also  because  the  rich  are  most  able  to  give  to 


ELEMENTS   OF   ECONOMICS  55 

their  children  the  the  highest  standards  of  life.  In  all  countries  the 
lower  classes,  that  is,  those  lowest  in  the  scale  of  civilization,  increase 
the  fastest,  which  hinders  the  progress  towards  a  higher  civiliza- 
tion; and  when  those  best  able  to  propagate  the  race  refuse  to  do  so, 
they  are  helping  the  downward  tendency  of  the  race.  Not  that  the 
race  actually  goes  backward,  necessarily,  but  when  the  rich  refuse 
to  help  elevate  it,  they  leave  the  work  for  the  lower  classes,  which 
increases  the  difficulty  of  elevating  the  race  through  the  various  up- 
lifting agencies,  the  school,  the  church,  the  state,  the  club. 

38.  OUR  IMMIGRATION  PROBLEM.  The  law  of  Malthus  has 
important  bearings  upon  our  immigration  problem,  and  it  helps  dis- 
pel several  popular  delusions  regarding  the  effects  of  immigration. 
The  prevailing  notions  among  the  masses  of  the  American  people 
seem  to  be  (1)  that  the  great  tide  of  immigration  into  this  country 
during  the  last  half  century  was  needed  to  develop  our  resources;  (2) 
that  these  foreigners  have  done  the  disagreeable  work  that  Amer- 
cians  would  not  do;  (3)  that  our  native  workers,  thus  benevolently 
relieved  of  the  disagreeable  tasks,  have  been  forced  up  into  higher 
positions. 

Such,  however,  are  not  the  facts  of  the  case.  Until  the  tide  of 
immigration  began  to  assume  large  proportions  after  1830  there  was 
no  notable  decrease  in  the  rate  of  increase  of  our  native  population, 
the  rate  of  increase  being  about  34  per  cent  per  decade.  But  since 
1840,  when  the  tide  began  to  affect  the  American  laboring  men,  the 
rate  of  increase  of  our  native  population  has  rapidly  declined  until 
it  is  about  stationary  in  the  older  portions  of  the  country.  And  taking 
the  total  population,  immigrants  included,  the  rate  of  increase  has 
steadily  declined  since  1860  until  it  reached  as  low  as  20  per  cent  for 
the  last  decade.  It  is  quite  evident,  therefore,  that  the  effect  of  im- 
migration has  been  to  check  the  rate  of  increase  of  the  native  popula- 
tion and  that  the  total  population  is  probably  little  larger  than  it 
would  have  been  had  there  been  no  immigration.  Our  polulation 
is  rapidly  becoming  transformed  from  the  old  Teutonic   stock  to  a 


56  ELEMENTS   OF   ECONOMICS 

mixture  of  races  from  southern  Europe  and  western  Asia. 

We  can  see  this  process  at  work  all  over  the  country.  The  cot- 
ton industry  of  New  England  furnishes  a  good  example.  Half  a  cen- 
tury ago  the  work  in  the  cotton  mills  was  done  mostly  by  boys  and 
girls  from  the  farm.  As  the  falrms  became  cleared  and  improved, 
and  machinery  was  substituted  for  hand  labor,  the  farmer  no  longer, 
needed  so  many  of  his  children  at  home  to  help,  and  the  rise  of  the 
cotton  factories  afforded  an  outlet  for  surplus  labor  on  the  farms. 
When  the  French  Canadians  came  into  the  mills,  the  native  boys  and 
girls,  not  liking  the  low  wages  or  the  society  of  the  Canadians, 
would  not  work  in  the  mills.  Thus  the  outlet  for  the  surplus  labor  on 
the  farms  being  closed,  the  size  of  the  family  rapidly  declined. 
Families  of  eight  and  ten  children  were  common  in  earlier  days  in 
New  England,  where  now  families  of  more  than  two  or  three  childr>en 
are  rare. 

As  to  the  notion  that  foreigners  have  done  the  disagreeable 
work  that  Americans  would  not  have  done,  it  may  be  said  that  if 
there  is  any  work  unfit  for  respectable  Americans  to  do,  it  better  be 
left  undone,  if  conditions  cannot  be  improved;  for  the  main  business 
of  society  is  to  produce  respectable  human  beiners  rather  than  use 
them  as  mere  tools  for  the  production  of  wealth.  But  conditions 
surrounding  disagreeable  and  dangerous  work,  such  as  mining,  could 
be  greatly  improved,  were  we  not  so  anxious  to  secure  large  divi- 
dends on  capital.  But  even  if  conditions  of  such  work  could  not  be 
improved,  there  is  no  warrant  for  the  assertion  that  Americans 
would  not  do  it.  Higher  wages  doubtless  would  have  to  be  paid, 
and  that  is  where  the  desire  for  immigrant  labor  originates. 

It  is  a  very  preval-ent  notion  that  immigration  forced  the  native 
Americans  up  into  higher  positions.  Such  a  statement  must  mean 
either  that  a  g^reater  number  of  Americans  are  in  high  positions 
because  of  immigration  or  that  a  greater  proportion  of  Americans 
are  in  high  positions.  If  a  greater  number  are  in  higher  positions  it 
implies  either  that  some  people  other  than  Americans  formerly  filled 


ELEMENTS   OF   ECONOMICS  57 

these  high  positions  or  that  more  high  positions  were  created  by  im- 
mig^'ation  for  Americans  to  fill.  The  first  inference  is  of  course  ab- 
surd, for  none  but  Americans  were  here  to  fill  the  positions.  The 
second  inference  is  not  true,  since  our  industries  would  have  developed 
as  well  with  American  labor  as  with  foreign  labor.  All  that  the 
statement  about  forcing  Americans  up  can  mean,  theJrefore,  is  that  a 
larger  percentage  of  Americans  occupy  high  positions  because  of  im- 
migration. This  is  perfectly  true,  but  instead  of  Americans  being 
forced  into  higher  positions  they  have  been  forced  out  of  the  lower 
positions  and  in  their  struggle  to  maintain  their  standard  of  living, 
most  Americans  have  smaller  families.  Thus,  instead  of  immigration 
having  conferred  a  blessing  upon  the  country  by  relieving  the  Amer- 
icans of  disagreeable  work  and  giving  them  the  higher  positions,  it 
has  substituted  foreigners  for  natives  in  tbs  lower  ranks  of  laborers.  ^ 

We  would  not  necessarily  conclude  from  this  that  immigration 
since  1830  has  on  the  whole  been  a  bad  thing  for  the  country.  Each 
nation  has  some  good  points  which  other  nations  may  lack.  The  light 
hearted,  quick  witt-^  Irishman,  the  methodical,  painstaking,  economi- 
cal, substantial  Grerman,  the  emotional,  music  loving  Italian,  and  the 
patient  Slav,  added  to  the  energetic,  resourceful,  practical,  extrava- 
gant  American,  and  blended  ^to  one  nationality,  will  make  the 
Americans  of  the  future  the  most  resourceful,  powerful,  and  versatile 
race  in  the  world.  This  great  fact  should  not,  however,  blind  us  to 
the  necessity  at  the  present  time  of  restricting  somewhat  and  select- 
ing with  more  cai>8  the  immigration  now  pouring  in  upon  us,  in  order 
to  prevent  the  threatened  lowering  of  the  standard  of  living  of  our 
working  classes. 


58  ELEMENTS  OF  ECONOMICS 

CHAPTER  V. 

Efficiency    In    Production. 

34.  RICHNESS  OF  NATURAL  RESOURCES.  Efficiency  in 
production  depends  upon  the  efficiency  of  each  of  the  three  factors 
of  production  and  economy  in  their  organization.  The  most  important 
natural  resource  is  the  soil  from  which  our  food  must  be  obtained. 
A  nation  with  a  rich  soil  and  proper  climatic  conditions  is  blessed 
with  the  most  indispensable  elements  of  wealth.  Next  in  importance 
are  mineral  resources,  the  two  most  essential  of  which  are  iron  and 
coal.  Without  these  a  nation  must  depend  upon  other  peopLes  for 
the  most  of  their  tools  and  machinery.  Copper  is  increasingly  im- 
portant for  various  uses,  but  especially  for  the  thousands  of  miles  of 
teleg'iaph  and  telephone  wires  that  cover  the  earth.  Zinc,  tin,  lead 
and  other  metals  are  needed,  each  having  its  special  uses,  and  petrol- 
eum is  now  indispensable.  The  precious  metals  are  needed  not  only 
for  money  but  in  the  arts.  Timber  is  a  most  important  resource,  for 
firewood,  for  building  purposes,  for  furniture,  and  for  machinery  of 
all  sorts.  Water  power  was  a  very  important  source  of  wealth  in  the 
infancy  of  the  age  of  machinery,  before  steam  largely  displaced  it. 
But  water  power  has  held  its  own  in  "certain  industries,  notably  in  the 
textile  industries.  With  the  increasing  use  of  electricity  waterpower 
will  assume  a  new  importance,  for  it  is  as  good  as  steam  and  much 
cheaper  for  generating  electricity.  Not  the  least  important  of  a  na- 
tion's resources  are  the  natural  facilities  for  transportation,  includ- 
ing navigable  rivers  and  lakes  and  opportunities  for  building  canals. 

In  all  these  natural  resources  the  United  States  is  richly  blessed. 
The  great  Mississippi  Valley  is  one  of  the  largest  tracts  of  rich  land 
in  the  world,  and  we  are  just  beginning  to  develop  through  irrigation 
and  dry  farming  the  vast  regions  of  the  West.  The  variety  of  soil 
and  climate  also  makes  possible  the  cultivation  of  a  great  variety  of 
crops.  The  United  States  is  rich  in  mineral  resources.  It  is  estimated 
that  our  available  coal  supply  is  about  three  trillions  of  tons,  which 


ELEMENTS  OF  ECONOMICS  59 

is  about  a  third  more  than  the  supply  of  all  the  remainder  of  the 
world,  and  in  the  annual  production  of  coal  this  country  leads  all 
others.  We  produce  about  twice  as  much  iron  as  Germany,  more 
than  three  times  as  much  as  Great  Britain,  and  five  times  as  much  as 
France  or  Spain.  We  produce  more  than  half  the  copper  supply  of 
the  world,  nearly  one-third  the  lead,  about  one-third  the  zinc,  and 
two-thirds  of  the  crude  pertroleum.  We  did  have  abundance  of  tim- 
ber, but  wasteful  methods  of  lumbering  and  forest  fires  are  rapidly 
exhausting  that  very  necessary  resource.  Measures  are  being  taken, 
however,  to  check  the  destruction  and  to  reforest  our  depleted  lands. 
With  such  an  abundance  of  resources  and  splendid  facilities  for  trans- 
portation, if  properly  developed,  the  United  States  is  destined  to  be- 
come one  of  the  richest  nations  in  the  world. 

35.  EFFICIENCY  OF  CAPITAL.  Efficiency  of  capital  depends 
upon  the  nature  of  the  instruments  of  production  and  the  nature  of 
the  improvements  of  the  soil.  It  is  highly  important  that  a  nation 
keep  abreast  of  the  times  in  these  matters.  In  the  great  interna- 
tional struggle  for  the  world's  markets,  success  depends  largely  upon 
the  efficiency  of  the  productive  apparatus.  Nothing  but  the  latest 
and  best  machinery  will  enable  a  nation  to  compete  on  equal  terms 
with  wide-awake,  progressive  competitors.  Not  only  must  its  ma- 
chinery be  up-to-date,  but  also  its  methods  of  farming. 

In  the  invention  and  use  of  effective  machinery  the  United  States 
stands  in  the  front  rank  of  nations,  and  in  the  application  of  large 
machinery  for  doing  work  on  a  large  scale,  this  counti'y  leads  the 
world.  Other  nations  equal  us  and  probably  excel  us  in  the  invention 
of  machinery  and  processes  of  a  more  delicate  nature,  but  for  doing 
big  things  we  stand  without  a  rival.  The  causes  of  our  success  along 
these  lines  are  various.  The  colonist,  left  largely  to  his  own  re- 
sources, developed  ingenuity;  and  our  liberal  patent  laws  have  greatly 
stimulated  inventions,  for  a  fortune  awaits  the  successful  inventor. 
The  great  size  of  the  country  and  of  the  field  of  industry  doubtless 
has  had  much  to  do  with  the  direction  inventions  have  taken  in  this 


60  ELEMENTS  OF  ECONOMICS 

country,  since  the  vastness  of  the  industrial  operations  would  invite 
inventions  for  doing  big  things. 

The  United  States  has  fallen  behind  the  most  progressive  coun- 
tries of  Europe,  however,  in  the  scientific  cultivation  and  implrove- 
ment  of  the  soil.  The  land  has  besn  abundant,  cheap,  and  of  great 
natural  fertility.  Hence,  it  did  not  occur  to  our  people  that  the 
jsoil  needed  any  special  care,  and  it  begins  to  show  signs  of  exhaustion. 
We  have  been  doing  extensive  rather  than  intensive  farming,  partly 
because  there  has  been  mote  profit  in  the  former  than  in  the  latter 
method,  and  partly  because  it  is  characteristic  of  Americans  to  wani 
to  do  things  on  a  large  scale.  As  a  result,  we  have  been  "mining" 
our  soil,  as  one  writer  has  expressed  it,  rather  than  farming  it.  That 
is,we  have  been  taking  elements  out  of  the  soil  and  putting  nothing 
back  into  it.  In  the  South  during  the  slavery  days  this  was  especially 
characteristic  of  their  agriculture,  and  today  the  South  has  vast 
tracts  of  exhausted  soil,  awaiting  recuperation  through  scientific 
farming.    We  shall  return  to  this  problem  in  the  following  chapter. 

36.  EFFICIENCY  OF  LABOR.  The  efficiency  of  laborers  de- 
pends upon  their  physical,  mental  and  moral  qualities.  Physical 
ability  depends  upon  inherited  qualities  and  upon  food,  clothing, 
shelter  and  general  environment,  both  during  the  time  of  the  indi- 
vidual's growth  and  during  the  working  period.  If  a  people  inherit 
from  their  ancestors  strong,  vigorous,  healthy  bodies,  if  theix  children 
are  properly  fed,  clothed  and  cared  for,  so  that  nature  is  assisted  and 
not  hindered  in  its  work  of  perpetuating  the  good  qualities  inherited, 
and  if  as  laborers  they  have  proper  food,  clothing,  and  shelter,  and 
this  means  proper  homes,  'that  people  will  be  efficient  workers.  An 
under  fed,  poorly  clothed,  badly  housed  nation  is  a  nation  of  weak- 
lings, and  it  is  impossible  for  it  to  attain  a  high  degree  of  civiliza- 
tion. It  behooves  us,  therefore,  as  a  nation  to  look  to  our  "slums" 
and  those  in  poverty  everywhere.  From  the  point  of  view  of  mere 
production,  looking  at  our  laboring  population  as  mere  instruments 
of  production,  to  say  nothing  of  the  humanitarian  considerations,  it 


ELEMENTS   OF   ECONOMICS  61 

would  be  a  wise  economy  to  eradicate  such  slums  and  give  every 
normal  human  being  a  chance  in  life;  for  if  our  laborers  are  ineffi- 
cient the  whole  nation  is  poorer. 

But  physical  strength,  endurance,  and  vigor  are  of  little  avail 
unless  directed  by  an  intelligent  mind.  To  native  intelligence  must 
be  added  both  general. and  special  training.  We  need  general  educa- 
tion to  train  all  our  powers  in  a  general  way,  to  make  men  and 
women  capable  of  taking  a  broad  view  of  life,  to  enable  us  to  enjoy 
life,  and  to  enable  us  to  perform  our  part  in  the  institutions  of  so- 
ciety, the  home,  the  church,  the  state,  the  club;  and  then  we  need 
special  education  to  fit  us  for  the  business  side  of  life.  The  higher 
up  the  industrial  scale  we  go,  the  more  specialized  is  the  knowledge 
and  training  r-equired.  It  has  generally  been  considered  that  rough, 
"unskilled"  labor  needed  no  special  knowledge  or  guidance;  but  re- 
cent investigations  prove  that  in  doing  many  kinds  of  work,  consid- 
ered unskilled,  there  is  much  opportunity  for  improvement.  It  has 
been  demonstrated,  for  example,  that  by  handling  bars  of  pig  iron 
in  the  proper  way  workmen  can  do  two  or  three  times  as  much  work 
in  a  day  as  they  ordinarily  do,  and  be  no  more  exhausted  at  night 
than  they  are  by  doing  less  in  an  ineffective  way.  When  such  an 
increase  in  efficiency  is  possible  in  such  rough  work  it  shows  at  once 
the  possibilities  of  improvement  in  other  lines.  In  preparation  for 
many  kinds  of  work  scientific  knowledge  is  needed.  Science  and  in- 
dustry are  closely  associated  in  the  modern  world.  Chemistry,, 
physics,  botany,  biology,  all  the  sciences  of  nature  are  involved  in 
modern  industry;  hence  scientific  knowledge  must  be  obtained  for  the 
workers  higher  up.  For  other  kinds  of  work,  such  as  carpentering, 
iron  molding,  and  many  others,  some  years  of  apprenticeship  are 
necessary  in  order  to  learn  the  trade.  Hence  a  nation  should  in  some 
way  provide  opportunity  for  vocational  training  and  education. 

Efficiency  of  labor  depends,  finally,  upon  the  moral  qualities  of 
the  people.  Honesty,  reliability,  and  willingness  to  do  a  fair  day*s 
work  are  as  essential   as  mental   and   physical   ability.     If  working 


62  ELEMENTS   OF   ECONOMICS 

men  were  perfectly  honest,  that  is,  willing  to  do  a  fair  day^s  work, 
whether  under  the  eye  of  the  "boss"  or  not,  much  less  superintend- 
ence would  be  needed  and  .the  cost  of  production  would  be  much  less. 
Wherever  one  sees  small  groups  of  men  at  work,  even  though  there 
be  but  three  or  four,  one  man  is  set  to  watch  the  others  to  see  that 
they  do  an  honest  day*s  work  while  he  does  nothing.  All  this  is  an 
extra  burden  upon  the  people  which  they  must  bear  in  the  shape  of 
higher  prices. 

37.  SOCIAL  COOPERATION  IN  PRODUCTION.  Let  us  now 
consider  the  organization  of  the  factors  of  production.  Organization 
of  the  factors  of  production  includes  at  least  five  distinct  phases,  (1) 
social  cooperation,  (2)  forms  of  business  organization,  (3)  the  size 
of  the  business  unit,  (4)  the  relative  amount  of  the  three  factors 
used,  and  (5)  organization  of  marketing.  Social  cooperation  in- 
volves two  varieties,  division  of  occupation  and  division  of  labor  with- 
in the  occupation.  Division  of  occupation  occurs  when  some  men 
become  carpenters,  others  blacksmiths,  others  farmers,  others  cloth- 
makers,  and  so  on  through  the  long  list.  In  division  of  labor  there 
is  cooperation,  because  each  man  is  doing  his  special  work  in  society 
and  all  are  working  towards  one  common  end,  the  satisfaction  of  hu- 
man wants.  Each  satisfies  his  wants  only  to  a  small  degree  or  not 
at  all  with  the  products  of  his  own  industry,  but  he  sells  most  of  his 
product,  or  all  of  it,  and  buys  what  he  wants.  Each  man  is  dependent 
upon  the  rest  of  mankind  for  the  satisfaction  of  most  or  all  of  his 
wants. 

Division  of  labor  within  the  occupation  or  business  is  social  co- 
operation, because  each  worker  does  only  one  small  part  of  the  pro- 
cess of  making  a  certain  thing  or  of  rendering  a  given  service,  and 
all  are  doing  their  share  in  satisfying  one  want.  The  product  is  the 
result  of  the  joint  labor  of  all.  We  may  place  the  workers  in  any 
business  into  two  groups,  those  who  are  brain  workers,  and  the  labor- 
ers whom  they  direct.  In  a  department  store,  for  example,  there  is 
the  general  business  manager,  the  department  managers,  the  floor 


ELEMENTS   OF   ECONOMICS  63 

managers,  cashiers,  bookkeepers  and  salespeople,  but  only  the  last 
are  actually  doing  the  work  of  selling  goods  to  customers,  and  they 
are  working  under  the  direction  of  those  above  them.  In  many  lines 
of  business  subdivision  of  labor  is  carried  to  a  very  high  degree  of 
minuteness.  In  making  shoes,  for  example,  there  are  scores  of  dif- 
ferent operations,  each  worker  having  only  one  operation  to  perform. 
The  exact  number  of  these  operations  would  vary  with  the  type  of 
shoe  and  the  methods  of  manufacture,  but  in  any  case  each  worker 
has  a  very  small  part  of  the  process  of  making  a  shoe.  S-averal  are 
cutting  out  the  different  parts  of  the  shoe,  each  of  the  several  seams 
are  sewed  on  a  different  machine  by  a  different  worker,  and  several 
are  finishing  and  polishing.  In  our  great  meat  packing  establish- 
ments division  of  labor  is  carried  far.  In  removing  the  hides,  for 
example,  there  are  several  men  at  work,  each  removing  only  a  cer- 
tain portion  of  the  hide. 

38.  ADVANTAGES  OF  SOCIAL  COOPERATION.  Social  co- 
operation has  several  advantages,  three  of  which  are  especially  im- 
portant, increase  in  skill,  increase  in  inventions,  and  the  opportunity 
of  each  to  apply  his  special  talents.  Division  of  occupation  leads  to 
greater  skill,  because  the  frequent  repetition  of  the  same  process, 
which  results  in  an  increase  of  product  and  an  improvement  in  the 
quality.  In  the  early  ages  of  society  everything  man  made  was  crude; 
but  when  a  man  gave  his  whole  time  to  one  thing,  say  making  furni- 
ture, he  would  learn  to  work  more  rapidly  and  at  the  same  time  give 
grace  and  beauty  to  his  product.  With  the  more  minute  subdivision 
of  labor,  skill  would  be  further  increased  because  of  more  frequent 
repetition.  In  many  cases,  however,  the  improvement  would  be  in 
quantity  rather  than  quality,  since  no  one  person  makes  the  article, 
and  beauty  would  have  to  come  from  the  imitation  of  a  pattern  or 
design  of  only  a  portion  of  the  article,  and  the  putting  together  might 
not  be  so  artistically  done  as  when  one  person  makes  the  whole  thing. 
Then,  too,  with  the  coming  of  the  machine  process,  the  sense  of 
beauty  of  design  would  be  cultivated  only  in  the  pattern  makers. 


64  ELEMENTS   OF   ECONOMICS 

Division  of  occupation  and  division  of  labor  lead  to  inventions  be- 
cause, when  a  man^s  work  is  narrowed  in  its  scope  he  can  study  more 
minutely  the  processes  involved  and  new  and  better  ways  of  doing 
the  work  can  be  studied,  and  new  machines  invented.  Also,  in  this 
division  of  labor  some  will  become  men  of  science,  and  then  inven- 
tions will  multiply  rapidly,  since  a  knowledge  of  nature  is  essential 
to  the  inventor.  This  explains  why  through  the  long  ages  so  few 
things  were  invented  before  the  eighteenth  century.  Division  of  labor 
had  advanced  far  long  before  that,  but  man's  knowledge  of  nature 
was  too  limited  to  aid  inventions  beyond  what  had  been  blindly  work- 
ed out  centuries  earlier.  When  men  learned  enough  of  the  secrets  of 
nature  to  see  their  application  to  machines,  inventions  multiplied,  and 
the  Age  of  Machinery  began  rather  suddenly. 

A  third  advantage  in  social  cooperation  is  that  each  person  can 
do  what  he  is  best  fitted  for.  Some  can  be  great  scholars  and  lead  the 
world  into  higher  realms  of  knowledge;  some  with  great  powers  of 
organizing  industry  can  bring  capital,  land  and  labor  together  and 
direct  their  efforts  to  larger  results;  each  can  turn  to  the  industry  he 
likes  best,  and  those  gifted  chiefly  with  physical  powers  can  do  hard 
work,  under  the  direction  of  superior  minds.  Thus  all  can  cooperate 
in  increasing  man's  material  and  also  his  higher  welfare.  All  are 
working  towards  one  great  end,  raising  man  to  a  higher  plain  of 
civilization.  At  this  point  the  thought  is  borne  in  upon  us  that  all 
honest  work,  however  rough,  uninviting  and  humble,  is  contributing 
to  man's  welfare,  and  all  workers  are  to  be  honored  and  respected; 
and,  too,  we  cannot  escape  the  conviction  that  thus  far  in  the  world's 
history  our  humbler  workers,  our  brothers  in  the  toil  for  all  human- 
ity, have  borne  more  than  their  share  of  the  hard  work  of  society 
and  received  too  little  of  the  higher  comforts  of  life. 

39.  DISADVANTAGES  OF  SOCIAL  COOPERATION.  Unfortu- 
nately there  are  several  disadvantages  resulting  from  cooperation. 
Division  of  occupation  makes  it  possible  for  some  lines  of  business  to 
become  overcrowded  with  capital  and  the  less  able  men  are  driven 


ELEMENTS  OF  ECONOMICS  65 

to  the  wall  by  severe  competition.  Also  the  division  of  labor  may  re- 
sult in  some  trades  becoming  overcrowded,  especially  with  skilled 
labor.  Young  men  may  prepare  themselves  for  a  certain  trad«  and 
find  that  too  many  are  in  jthat  trade.  In  that  case  they  must  be  con- 
tent to  do  unskilled  labor  or  else  go  to  the  expens-a  of  learning  an- 
other trade.  And  evan  the  unskilled  laborers  may  find  it  difficult  to 
get  work  even  at  starvation  wages;  for  with  the  division  of  labor  and 
the  machine  process  the  mass  of  men  must  lose  their  industrial  ind'3- 
pendence'  and  become  wage  earners.  Thus  increased  social  efficiency 
is  attended  with  the  loss  of  industrial  independence  for  th-e  individual. 
The  more  specialized  each  man's  work  becomes  the  greater  is  the 
danger  that  some  cannot  get  work,  or  only  at  a  wage  too  low  to  keep 
soul  and  body  together.  In  order  to  minimize  these  evils  society  should 
undertake  the  study  of  the  needs  and  opportunities  in  the  different 
lines  of  industry  so  that  young  men  with  capital  would  have  some 
general  knowledge  of  the  opportunities  for  investing  capital  in  the 
different  lines  of  business,  and  young  men  who  wish  to  learn  a  trade 
would  be  able  to  choose  with  some  knowledge  not  m-arely  of  their  own 
aptitud-es  but  of  the  needs  and  opportunities  in  the  different  trades. 
Vocational  guidance  needs  to  consider  both  the  characteristics  of  the 
individual  and  conditions  in  the  different  industries. 

Another  class  of  evils  resulting  from  cooperation  is  the  monotony 
of  the  work.  This  is  especially  true  of  minute  sub-division  of  labor, 
where  a  person  hour  after  hour,  day  after  day,  year  after  year,  has  to 
perform  one  simple  operation,  like,  for  example,  cutting  out  soles  of 
shoes  or  sewing  on  a  machine  run  by  steam  power  or  electric  power 
one  short  seam  in  shoes.  Such  monotonous  work  not  only  fails  to  de- 
velop mind  and  body  as  work  of  a  varied  and  more  complex  character 
would  do,  but  body  and  mind  are  actually  weakened  from  lack  of  ex- 
ercise. It  is  this  monotony  that  is  especially  injurious  to  young  chil- 
dren whose  minds  and  bodies  haye  not  yet  fully  matured.  To  coun- 
teract this  deadening  effect,  society  should  provide  proper  oppor- 
tunities for  amusement,  exercise,  recreation  and  study.     Instead  of 


66  ELEMENTS  OF  ECONOMICS 

having  one  great  library  in  the  city,  inaccessible  to  most  laborers  be- 
cause too  far  away,  there  should  be  other  smaller  libraries  and  read- 
ing rooms  within  reach  of  all.  These  could  well  be  at  the  school 
houses,  which  should  be  made  social  centers  for  recreation  and  enjoy- 
ment. 

Because  of  this  minute  division  of  labor  and  the  machine  pro- 
cess, are  the  two  evils  of  child  labor  and  of  mothers  working  in 
factories  when  they  should  be  at  home  caring  for  their  children. 
The  work  is  often  so  simple  and  easy  that  women  and  children  can 
do  it  as  well  as  men,  and  since  they  can  be  hired  for  lower  wages, 
the  children  and  the  mother  of  the  family  are  at  work  while  the 
father  is  idle,  either  because  of  laziness  or  because  he  cannot  get 
work.  This  is  such  a  large  problem  that  we  postpone  its  dis- 
cussion. 

40.  FORMS  OF  BUSINESS  ORGANIZATION.  A  second  group 
of  forms  of  organization  of  the  three  factors  may  be  called  forms 
of  business  management.  These  forms  are  not  concerned  with  the 
relations  among  the  three  factors  so  much  as  with  the  relations 
among  those  who  manage  the  business.  There  are  at  least  five 
forms  of  business  organization,  the- single  manager  system,  the  part- 
nership, the  corporation,  cooperation  in  management  on  the  part  of 
workmen  or  producers,  and  ownership  and  management  by  the  govern- 
ment. The  corporation  is  so  important  that  we  reserve  it  for  special 
treatment.  In  brief,  a  corporation  is  a  company  having  a  charter 
making  it  a  legal  person,  and  with  its  capital  divided  into  shares. 

The  simplest  form  of  organization  is  the  single  manager  system, 
where  one  man  owns  and  controls  the  business.  The  only  coopera- 
tion in  the  management  is  that  between  the  owner  and  his  hired 
help,  which  is  included  in  division  of  labor.  But  the  one  man  is 
legally  and  industrially  responsible  for  the  success  of  the  under- 
taking, and  he  alone  gets  the  immediate  benefit  of  such  industrial 
conditions  as  make  his  profits  large,  and  he  alone  is  the  one  who 
suffers  reverses,  unless  they  are  so  severe  as  to  make  it  impossible 


ELEMENTS   OF   ECONOMICS 


to  keep  his  employees  at  work  and  pay  them  the  accustomed  wages. 

In  the  partnership  there  is  real  cooperation  in  the  business  man- 
agement, besides  that  between  the  managers  and  employees.  The 
partners  may  cooperate  in  various  ways.  Sometimes  one  man  furn- 
ishes great  organizing  ability  and  experience,  with  no  capital  'or 
only  a  small  amount,  and  another  may  furnish  most  of  the  capital, 
with  little  ability  or  experience.  Again,  the  partners  may  unite 
their  abilities  in  determining  certain  large  questions  of  policy  and 
each  act  as  head  of  a  special  department  of  the  business.  The  ad- 
vantages of  the  partnership  form  over  the  single  manager  system 
are  (1)  a  large  capital,  which  may  be  needed  in  certain  kinds  of 
business,  (2)  united  wisdom  in  counsel,  (3)  greater  interest  in  the 
success  of  the  business  as  heads  of  departments  than  hired  helpers 
would  have. 

Cooperation  in  management,  as  the  term  is  used  by  economists 
and  business  men,  is  really  a  form  of  partnership.  A  partnership 
is  cooperation  in  business  management,  and  the  names  of  the  two 
forms  of  organization  do  not  indicate  their  differences.  Cooperation, 
as  used  in  this  connection,  does  not  in  fact  refer  so  much  to  the 
form  of  organization  as  to  the  character  of  the  persons  cooperating. 
Originally,  cooperation  meant  the  ownership  of  the  business  by  the 
laborers  themselves,  who  employ  their  own  business  managers. 
Later,  farmers  cooperated  in  establishing  and  managing  creameries, 
grain  elevators,  and  associations  for  marketing  fruit  or  other 
products  The  form  of  organization  might  be  the  partnership  or  the 
corporation,  or  indeed  any  other  form  th*t  might  be  devised.  The 
purposes  of  these  cooperative  organizations  are  to  secure  the  profits 
of  middlemen  and  managers.  In  the  jcase  of  laborers  establishing  co- 
operative retail  stores  the  purpose  is  to  get  commodities  cheaper, 
and  the  farmers  desire  to  reap  some  of  the  profits  that  otherwise 
would  go  to  middlemen.  Such  organizations  may  or  may  not  be 
more  efficient  than  the  forms  of  business  they  displace.  The  signifi- 
cant thing  about  cooperation  in  this  narrow  sense  is  not  increase 


68  ELEMENTS   OF  ECONOMICS 

in  efficiency  but  the  diversion  of  profits  from  one  class  of  people 
to  another. 

The  fifth  form  of  business  organization  is  government  owner- 
ship and  management.  In  this  case  there  is  no  special  form  of 
organization;  the  essential  thing  about  it  is  that  the  managers  are 
government  officials.  The  government  might  appoint  a  single  head 
to  manage  the  business,  it  might  manage  it  through  a  commission^ 
which  would  approach  the  partnership  form,  or  it  might  organize 
it  after  the  pattern  of  a  _  corporation,  with  stock  owned  by  the 
public.  Government  ownership  may  or  may  not  be  more  efficient  than 
private  ownership,  owing  to  circumstances.  The  greater  or  less 
efficiency  would  not  depend  upon  the  forms  of  organization,  since 
these  could  be  the  same  in  private  as  in  public  ownership,  but  upon 
relative  ability  of  public  or  private  managers.  The  question  of 
public  or  private  ownership  is  not  so  much  a  question  of  efficiency 
as  it  is  a  question  of  distribution,  that  is,  whether  the  profits  of 
the  business  shall  belong  to  a  few  managers  or  to  the  public.  The 
three  essentially  different  forms  of  business  organization  are  there- 
fore the  single  manager,  the  partnership  and  the  corporation. 

41.  CORPORATIONS.  There  are  at  least  five  characteristics 
of  corporations  which  must  be  clearly  understood,  for  out  of  these 
characteristics  come  the  advantages  and  the  evils  of  this  form  of 
organization.  As  stated  above,  a  corporation  has  a  charter  granted 
by  the  government,  making  the  company  a  legal  person,  capable  of 
acting  as  a  natural  person  in  business  affairs.  It  can  conduct  busi- 
ness,  sue  in  the  courts,  inherit  and  bequeath  property. 

Its  charter  gives  the  corporation  continuous  life.  In  some 
cases  the  charter  is  given  only  for  a  term  of  years,  usually  twenty 
years  or  more,  but  in  such  cases  the  charter  is  usually  renewed 
before  the  expiration  of  the  time  limit.  More  often  there  is  no 
time  limit  to  the  charter.  In  case  of  the  single  manager  system 
the  business  terminates  with  the  death  of  the  owner  unless  his  heirs 
are  desirous   of  continuing  it.     The  partnership   may  have   a   more 


ELEMENTS   OF   ECONOMICS  69 

continuous  life  than  that  of  the  single  manager  system,  but  with 
the  death  of  a  member  the  business  must  be  re-adjusted,  and  is 
therefore  less  permanent  than  the  corporation. 

The  capital  of  the  corporation  is  divided  into  shares,  usually 
of  one  hundred  dollars  each.  This  is  often  referred  to  as  the  joint- 
stock  principle.  When  an  investment  is  made  in  a  corporation  evi- 
dence of  such  investment  consists  of  stocks  or  bonds,  which  are 
pieces  of  paper  certifying  the  amount  invested.  Stockholders  are 
the  real  owners,  as  they  alone  can  take  part  in  governing  the  busi- 
ness. Bondholders  are  creditors.  From  the  business  point  of  view, 
bonds  are  safer  than  stocks,  since  bondholders  receive  a  stipulated 
rate  of  interest,  and  in  case  the  interest  is  not  paid  they  can  take 
possession  of  the  business.  Stocks  are  often  divided  into  common 
and  preferred.  The  preferred  stock  is  guaranteed  a  certain  rate 
of  interest,  usually  one  or  two  percent  higher  than  that  paid  on 
bonds;  but  the  bondholders  are  more  secure  than  preferred  stock- 
holders, since  in  case  of  reverses  interest  on  bonds  must  be  paid 
before  interest  on  preferred  stock  caii  be  paid.  The  common  stock 
is  the  least  secure  and  the  most  speculative  form  of  investment. 
If  the  business  is  prosperous,  all  earnings  above  what  is  necessary 
to  pay  interest  on  bonds  and  preferred  stock  go  to  the  holders  of 
common  stock;  and  in  times  of  adversity  interest  on  common  stock, 
that  is  dividends,  may  be  very  low  or  nothing  at  all. 

The  corporation  is  managed  by  a  small  number  of  the  owners. 
Usually  about  half  the  capital  consists  of  bonds,  and  in  a  corpora- 
tion, therefore,  those  who  virtually  own  one-half  the  property  have 
no  voice  in  the  management.  Another  corporation  could  buy  up 
one  share  over  half  the  stock  and  control  four  times  as  much  capital 
as  it  owned.  Then  a  small  number  of  men  might  own,  one  share 
over  half  the  stock  of  the  second  corporation  and  by  controlling  its 
action  control  eight  times  as  much  capital  as  they  own.  In  extreme 
cases  one  man  might  own  the  controlling  interest  in  the  second 
corporation    and    ownership    and    management    would    be    still    more 


70  ELEMENTS  OF  ECONOMICS 

widely  separated.  Even  when  there  is  a  large  number  who  own. 
the  controlling  interest  in  the  business,  the  management  is  in  the 
hands  of  a  few,  usually  called  the  board  of  directors,  elected  by  the 
stockholders. 

The  fifth  characteristic  of  business  corporations  is  the  prin- 
ciple of  limited  liability.  In  a  partnership  each  partner  is  liable 
for  the  debts  of  the  company,  even  though  only  a  small  fraction  of 
his  wealth  may  be  invested  in  the  business.  In  a  corporation  stock- 
holders are  usually  liable  only  to  the  amount  of  their  investment. 
That  is,  if  a  man  buys  a  hundred  dollar  share  in  a  corporation  he 
may  loose  it  if  the  company  fails,  but  creditors  cannot  take  any  of  his 
property  not  invested  in  the  business. 

42.  ADVANTAGES  OF  CORPORATIONS.  Owing  to  these  var- 
ious characteristics,  corporations  have  several  advantages  over  other 
forms  of  business  organization.  Continuous  life  enables  it  to  look 
far  into  the  future  and  pursue  a  continuous  policy.  The  death  or 
withdrawal  of  members  need  not  interfere  in  the  least  with  plans 
looking  many  years  ahead.  A  railroad  corporation,  for  example, 
might  lay  its  tracks  and  adjust  its  rates  so  as  to  develop  the  re- 
sources of  a  certain  region,  which  might  take  twenty  years  or  more. 
The  region  to  develop  might  be  uninhabited,  and  to  induce  settlers 
to  gather  and  develop  the  country  would  be  a  work  of  many  years. 
The  private  individual  or  the  partnership  concern  would  seldom  look 
so  far  ahead,  and  if  it  did  the  death  of  one  of  the  leading  members 
might  upset  the  plans.  Such  a  result  might  be  brought  about  by 
the  death  of  a  leading  man  in  a  corporation;  but  it  is  not  apt  to  do 
so,  since  the  life  of  the  corporation  is  continuous  and  its  policy  is 
determined  by  the  will  of  a  number  of  individuals,  as  a  rule. 

A  second  advantage  of  the  corporation  is  the  large  capital  it  is 
enabled  to  gather  from  the  ends  of  the  earth.  Continuous  life,  joint- 
stock,  and  limited  liability  make  the  corporation  very  attractive  to 
investors,  both  great  and  small.  Investors  usually  desire  to  place 
their  money  in  a  business  that  is  permanent.     The  joint-stock  prin- 


ELEMENTS  OF  ECONOMICS  71 


ciple  makes  it  a  convenient  form  of  investment.  As  one's  income 
accrues  from  month  to  month  or  from  year  to  year,  savings  can  be 
invested  as  soon  as  they  amount  to  one  share  of  stock.  Investors  can 
take  their  choice  of  preferred  or  common  stock  or  bonds.  And  the 
limited  liability  makes  it  safe  for  a  man  with  other  property  to  in- 
vest as  much  as  he  desires  in  the  corporation,  for  he  runs  no  risk 
of  losing  more  than  his  investment. 

Stocks  or  bonds  of  a  good  corporation  furnish  a  good  investment 
for  those  who  have  not  enough  capital  to  enable  them  to  go  into  busi- 
ness for  themselves,  or  who  for  any  reason  do  not  wish  to  engage  in 
business.  Widows,  orphans,  workingmen,  all  find  in  the  corpora- 
tion a  suitable  and  convenient  place  for  the  investment  of  their  small 
fortunes,  or  their  small  savings, 

A  fourth  advantage  of  the  corporate  form  of  business  is,  that  it 
is  more  likely  to  undertake  new  lines  of  business  than  are  other  forms 
of  organization.  The  joint-stock  principle  and  limited  liability  make 
the  corporation  venturesome.  New  companies  may  be  formed  in  which 
each  investor  risks  but  a  small  amount,  and  it  may  venture  into  un- 
tried fields  without  bringing  any  great  disaster  to  the  investors  if 
it  fails;  and  if  it  succeed,  handsome  dividends  may  be  realized.  Thus 
new  fields  of  industry  may  be  explored  and  the  resources  of  a  coun- 
try developed. 

A  fifth  advantage  of  the  corporation  is  its  ability  to  secure  able 
managers.  With  a  large  number  of  members  from  which  to  choose 
officers,  able  men  may  be  secured.  And  with  the  large  capital  it 
can  employ  men  who  may  not  be  stockholders  but  who  possess  great 
executive  ability,  because  it  can  afford  to  pay  large  salaries. 

Thus  it  will  be  seen  that  the  corporation  is  the  best  known  form 
of  business  organization  for  large  undertakings.  Modern  business 
could  hardly  exist  without  the  corporate  form  of  organization.  Large 
capital  and  continuous  policy  are  most  essential  to  many  kinds  of 
business.     Railroads,  the  steel  industry,  and  many  others  that  might 


72  ELEMENTS  OF  ECONOMICS 

be   enumerated,   must  have   large   capital,   continuous   life,   and   able 
management. 

43.  EVILS  OF  CORPORATIONS.  Unfortunately  these  advan- 
tages of  corporations  may  result  in  serious  evils  to  society.  The  cor- 
poration may  become  so  large  that  it  is  a  monoply,  and  all  its  ad- 
vantages as  a  superior  instrument  of  production  will  be  enjoyed  only 
by  the  owners  of  the  business,  while  th-e  other  members  of  the  com- 
munity are  injured  by  extortionate  prices. 

Stock-watering  is  another  evil  which  results  from  the  division 
of  the  stock  into  shares,  because  these  pieces  of  paper  can  so  easily 
be  multiplied  and  disposed  of  in  such  a  way  that  the  amount  of  the 
capital  stock  is  much  larger  than  the  amount  of  money  actually 
invested.  There  are  several  methods  of  stock-watering.  A  stock 
dividend  may  be  declared,  by  which  the  amount  of  each  person's  stock 
is  increased  automatically.  In  the  consolidation  of  several  companies 
their  values  may  be  placed  too  high,  and  the  stock  of  the  consolidated 
company  issued  to  the  full  amount  of  the  false  valuation.  Another 
device  is  to  accredit  repairs  to  new  construction  in  their  system  of 
bookkeeping  and  then  issue  new  stock  to  cover  it.  Another  way  to 
over-issue  stock  is  to  sell  it  for  only  a  fraction  of  its  face  value. 
Speculative  promotors,  for  instance,  in  order  to  float  stock  of  a  new 
company,  sometimes  put  into  the  concern  about  one-tenth  as  much 
money  as  the  number  of  shares  would  indicate,  then  by  judicious  ad- 
vertising sell  the  stock  to  an  unsuspecting  public  for  full  face  value. 

Stock-watering  is  an  evil  because  it  may  deceive  investors  and 
because  it  may  deceive  the  government  which  may  be  attempting 
to  regulate  the  earnings  of  the  company  or  the  prices  it  may 
charge.  If  the  stock  is  half  water  and  the  government  should  allow 
a  rate  or  price  that  would  net  the  company  six  per  cent  on  its  capital 
stock,  it  would  in  reality  be  earning  twelve  per  cent  on  the  money 
actually  invested. 

Speculative  promotion  is  another  evil  characteristic  of  corpora- 
tions.    A.  band  of  schemers  get  a  charter,    organize  themselves  into  a 


ELEMENTS  OF  ECONOMICS  ,  73 

company,  appoint  themselves  the  board  of  directors  at  handsome 
salaries,  sell  a  lot  of  stock,  make  a  show  of  establishing  the  busi- 
ness, but  pocket  most  of  the  money  by  paying  themselves  big  salaries 
and  by  other  fraudulent  means,  and  the  investors  receive  little  divi- 
dends. The  federal  gov-ernment  reports  that  the  American  people 
are  thus  cheated  out  of  millions  of  dollars  annually  by  bogus  com- 
panies with  get-rich-quick  schemes.  The  joint-stock  principle  and 
the  limited  liability,  which  invite  the  public,  and  the  opportunity 
for  a  small  knot  of  individuals  to  manage  the  affairs  of  the  company 
for  their  own  benefit  are  responsible  for  the  formation  of  companies 
m-erely  for  the  purpose  of  selling  worthless  stock. 

A  fourth  evil,  closely  connected  with  th-e  last,  is  the  misman- 
agement by  the  few  for  their  own  benefit  and  to  the  injury  of  the 
mass  of  the  stockholders.  This  may  be  done  not  only  in  starting 
bogus  companies  but  in  managing  an  old  and  profitable  corporation. 
A  small  body  of  men  who  together  own  the  controlling  interest  in 
the  holding  company  may  elect  themselves  officers  of  the  company 
with  salaries  far  beyond  their  earning  power  and  thus  reduce  the 
dividends  below  what  they  ought  to  be.  Also  by  manipulating  the 
books,  or  by  other  means,  they  may  increase  their  income  at  the  -ex- 
pense of  the  small  stockholders. 

A  fifth  evil  and  by  no  means  the  least  which  may  result  from 
the  corporation  is  the  industrial  crisis.  The  venturesome  spirit  of 
the  corporation  is  apt  to  lead  into  fields  that  turn  out  to  be  un- 
profitable. If  this  is  done  on  a  large  scale  by  many  large  corpora- 
tions, an  industrial  crash  is  bound  to  follow.  If  the  dividends  are  re- 
duced, banks  and  other  corporations  that  may  hold  the  stock  of  the 
failing  companies  suffer  loss  and  may  fail;  and  thus  one  company 
after  another  is  pulled  down,  resulting  in  a  "run"  on  the  banks  and 
a  general  collapse  of  credit  and  the  cessation  of  many  kinds  of 
business. 

44.  ECONOMY  OF  LARGE-SCALE  PRODUCTION.  The  third 
phase  of  organization  concerns  the  size  of  the  business.     Each  indus- 


74  ELEMENTS  OF  ECONOMICS 

try  or  line  of  business  has  its  peculiar  characteristics  which  deter- 
mine the  natural  size  of  the  business  unit.  In  some  kinds  of  business^ 
as  the  retail  drug  store  or  the  retail  grocery,  the  unit  is  naturally 
small,  while  in  the  steel  and  iron  manufacturing  business  the  unit  is 
very  large,  and  in  the  railway  world  the  natural  unit  is  much  larger 
still.  In  each  line  of  business  there  is  a  certain  si^  which  repre- 
sents the  maximum  of  efficiency.  If  the  business  is  either  larger 
or  smaller  than  this  maximum  size  it  will  he  less  efficient.  This 
means  that  the  product  of  the  larger  or  the  smaller  unit  will  be  less 
in  proportion  to  the  amount  of  labor  and  capital  expended.  This  is 
known  as  the  law  of  large-scale  production  or  the  law  of  economy  in 
organization.  The  latter  name  is  hardly  appropriate,  since  there  are 
several  laws  of  economy  in  organization.  Each  phase  of  social  co- 
operation involves  a  law  of  economy  in  organization.  Division  of  oc- 
cupation or  of  labor  is  more  economical  or  more  efficient  than  letting 
each  man  supply  all  his  own  needs.  Also  in  connection  with  the  forms 
of  business  organization  several  laws  of  economy  in  organization  may 
he  stated.  For  example,  the  corporation  is  the  best  form  of  organiza- 
tion, that  is  the  most  efficient  form,  for  large  undertakings  where 
the  business  should  be  permanent.  When  the  law  of  economy  in  or- 
ganization concerns  the  size  of  the  business,  it  is  usually  stated  as 
follows:  Increasing  the  size  of  the  business  increases  its  efficiency 
until  the  point  of  maximum  efficiency  is  reached.  This  is  correct. 
But  a  more  complete  statement  of  the  law  would  be  as  follows:  In 
each  line  of  business  there  is  a  certain  size  which  represents  the 
maximum  of  efficiency.  This  statement  of  the  law  implies  that  if  we 
start  with  a  unit  too  small,  efficiency  increases  with  size  up  to  the 
maximum,  and  after  that  point  is  reached  efficiency  decreases. 

This  law  is  true  for  several  reasons*  If  the  grocery  store  is  too 
small,  for  example,  it  is  impossible  to  keep  a  sufficient  variety  of 
goods  to  suit  all  kinds  of  customers,  and  if  it  is  too  large  much  of  the 
stock  lies  idle  a  long  time,  and  it  also  is  too  expensive  to  deliver  to 
such  a  wide  circle  of  customers.     In  the  manufacturing  business,  if 


ELEMENTS  OF  ECONOMICS  lb 

the  plant  is  too  small  it  is  impossible  to  make  good  us-e  of  all  the 
machinery.  Many  expensive  machines  might  have  to  be  idle  part  of 
the  time  while  the  other  machines  ara  getting  work  ready  for  these 
special  machines  or  finishing  up  the  work  where  these  machines  left 
it.  In  a  factory  for  making  hoisting  elevators  there  are  many  differ- 
ent machines,  each  making  a  different  part  of  the  elevator.  The  fac- 
tory must  be  large  enough  to  include  all  these  different  machines  and 
enough  of  the  different  kinds  to  keep  them  all  running  constantly. 
This  might  require  but  one  machine  of  some  kinds  that  turn  out  their 
parts  of  the  work  rapidly  while  of  other  kinds  of  machines  several 
of  each  might  be  required.  This  is  called  the  economy  in  the  use  of 
fixed  capital.  A  large  concern  can  also  employ  the  best  technical 
experts  or  the  ablest  managers  because  it  can  afford  to  pay  the  high 
salaries  to  get  such  talent.  Also  the  relative  cost  of  fuel  in  a  large 
plant  would  be  less  than  in  a  small  one.  A  fourth  item  is  in  the 
ability  to  make  use  of  by-products.  In  a  small  concern  it  would  not 
pay  to  establish  factories  for  making  into  marketable  products  things 
that  are  merely  by-products,  hence  these  things  are  wasted,  while  in 
a  large  establishment  it  pays  to  make  them  into  marketable  products. 
A  large  meat  packing  'establishment,  for  example,  can  utilize  all  parts 
of  the  animals.  A  fifth  item  to  consider  is  the  possibility  of  estab- 
lishing subsidiary  industries.  A  large  sugar  refinery  can  make  its 
own  barrels,  a  large  oil  refinery  can  make  its  ov^n  cans,  barrels^ 
pumps  and  other  supplies,  and  a  great  railroad  may  make  its  own  en^ 
gines  and  rails  from  iron  from  its  own  mines,  transported  on  its  own 
ore-roads,  and  make  its  own  ties  and  the  lumber  for  its  cars  from 
trees  cut  from  its  own  forest  lands. 

45.  SOME  RESULTS  OF  THIS  LAW.  From  this  law  important 
results  follow.  One  of  the  most  important  of  thes-e  results  is  mo- 
nopoly. In  case  the  unit  of  greatest  efficiency  is  large  enough  to 
supply  the  market  monopoly  is  inevitable.  The  largest  concern  has 
the  advantage  of  its  rivals  and  can  undersell  them  and  drive  them 
out  of  business.    This  would  be  a  good  thing  for  the  public  if  it  were 


76  ELEMENTS  OF  ECONOMICS 

the  final  result.  But  unfortunately  it  is  not.  When  all  rivals  are 
disposed  of  the  successful  company  raises  its  prices  above  the  com- 
petitive level  and  thus  reaps  exorbitant  profits.  If  a  rival  appears 
prices  will  be  put  down  until  the  new  com-er  is  crushed,  and  then 
prices  go  up  again.  In  case  the  rival  proves  as  strong  as  the  old 
company,  a  period  of  savage  competition  will  ensue  until  both  com- 
panies, tired  of  making  no  profits  at  all  or  only  very  small  profits, 
vdll  voluntarily  consolidate. 

.  The  size  of  the  market  which  one  company  may  monopolize  de- 
pends upon  the  nature  of  the  business.  In  the  ease  of  a  street  rail- 
way the  unit  of  greatest  efficiency  is  so  large  that  one  company 
can  serve  a  whole  city  more  cheaply  than  two  or  more  companies  can. 
In  the  steel  manufacturing  business  the  unit  of  greatest  efficiency 
is  large  enough  to  supply  a  large  portion  of  the  country,  the  size  of 
the  region  depending  upon  several  circumstances,  among  them  being 
cost  of  transportation. 

In  most  if  not  all  lines  of  retail  trade  the  unit  of  greatest  effi- 
ciency is  so  small  that  it  is  reached  before  even  the  local  market  is 
isupplied;  hence,  we  find  numerous  groceries,  shoe  stores,  drug  stores, 
clothing  stores,  and  other  lines  of  retail  business  in  small  cities.  In 
farming,  the  unit  is  so  small  that  monopoly  is  impossible  in  produc- 
tion. It  is  possible,  however,  for  farmers  to  unite  and  create  a  mo- 
nopoly in  marketing  certain  products.  Thus  the  fruit  growers  of  the 
Pacific  Coast  seem  to  have  formed  a  very  effective  monopoly  in  the 
marketing  of  citrous  fruits. 

In  some  cases  the  tendency  to  monopoly  is  off&et  by  smaller  con- 
cerns uniting  to  do  certain  things  while  remaining  separate  in  the 
main  line.  For  example,  several  small  companies  might  unite  in  es- 
tablishing subsidiary  industries  or  in  establishing  plants  to  utilize 
by-products.  And  with  the  increasing  use  of  water-power  to  gener- 
ate electricity  one  great  electric  plant,  such  as  that  at  Keokuk,  Iowa, 
can  supply  power  to  small  companies,  and  thus  make  it  cheaper  than 
for  the  small  concerns  to  generate  their  own  power. 


ELEMENTS   OF   ECONOMICS  77 

A  second  important  result  of  the  law  of  large-scale  production 
is  that  an  increase  in  population,  resulting  in  an  increased  demand 
for  goods,  might  lower  the  price  of  goods.  If  establishments  had  not 
reached  their  maximum  size,  increased  sales  would  enable  them  to 
produce  more  cheaply. 

46.  RELATIVE  AMOUNT  OF  THE  THREE  FACTORS:— LAW 
OF  DIMINISHING  RETURNS.  A  fourth  phase  of  organization  of 
the  productive  forces  is  concerned  with  the  relative  amount  of  the 
three  factors  used  in  the  business.  Not  only  must  the  business  be  of 
sufficient  size  to  obtain  the  best  results,  but  the  factors  must  be  used 
in  certain  proportions.  This  truth  may  be  stated  as  a  general  law, 
thus:  In  order  to  secure  the  best  results,  the  three  factors  must  be 
combined  in  certain  proportions,  the  proper  proportions  depending 
upon  the  nature  of  the  business  and  the  qualities  of  the  three  factors. 
If  the  factors  are  combined  in  any  other  proportion,  diminished  re- 
turns is  the  result  From  this  latter  fact  economists  have  generally 
called  this  the  law  of  diminishing  returns.  In  fact  if  any  of  the  great 
principles  of  organization  are  violated,  diminishing  returns  result. 
The  law  as  stated  above  will  cover  every  phase  of  the  law.  Under 
some  circumstances  we  would  have  increasing  returns,  as  when  we 
start  with  the  three  factors  out  of  proportion  and  then  proceed  to  ad- 
just them  properly. 

This  law  is  true  because  of  the  very  nature  of  the  three  factors. 
This  can  best  be  understood  by  taking  several  examples.  Suppose  a 
certain  amount  of  labor  and  capital  is  invested  in  the  cultivation  of  an 
acre  of  land  and  the  yield  is  only  ten  bushels  an  acre,  which  is  a  very 
poor  yield.  This  would  show  that  too  little  labor  and  capital  were  in- 
vested, supposing  the  season  to  be  favorable.  Doubling  the  amount 
of  labor  and  capital  would  more  than  double  the  crop,  possibly  pro- 
ducing thirty  or  forty  bushels.  But  a  point  would  be  reached  where 
an  increase  of  labor  and  capital  would  not  give  an  increased  yield  in 
proportion  to  the  labor  and  capital  expended.  This  is  true  because 
there  is  a  limit  to  the  capacity  of  the  soil.    Each  growing  plant  needs 


78  ELEMENTS   OF   ECONOMICS 

B,  certain  amount  of  moisture  and  sunlight,  and  crowding  the  plants 
will  diminish  their  size,  however  fertile  the  soil,  and  labor  spent  in 
xiultivation  beyond  a  certain  point  is  labor  wasted. 

Land  used  for  office  buildings  or  factories  obeys  the  same  law, 
hut  for  different  reasons.  A  building  two,  three  or  four  stories  high 
may  be  much  more  economical  than  a  building  only  one  story  high 
but  spread  over  more  ground.  Even  twenty  or  forty  stories  might  be 
more  economical  than  fewer  stories.  But  as  the  height  is  increased 
certain  items  of  cost  increase  that  offset  the  advantages  of  a  higher 
building,  and  a  point  is  reached  where  it  is  more  economical  to  buiM 
another  factory  or  office  building  rather  than  increase  the  height. 
Among  the  items  of  increasing  cost  would  be  for  elevator  service  and 
the  increasing  cost  of  the  walls  of  the  lower  portion  of  the  building 
in  order  to  make  it  strong  enough  to  support  the  immense  weight  of 
the  walls  above. 

Again,  suppose  a  factory  has  too  few  laborers  to  keep  the  machin- 
ery running  in  good  order.  Increasing  the  number  of  men  will  in- 
crease the  output  per  laborer.  But  when  there  are  enough  laborers  to 
keep  every  machine  running  in  good  order,  a  further  increase  of  la- 
borers might  increase  the  total  output  a  little,  but  the  output  per  la- 
borer would  be  diminished.  This  results  from  the  nature  of  man  and 
the  nature  of  the  tools  and  machines.  Man's  capacity  for  work  is 
limited  and  if  he  tries  to  look  after  too  much  machinery  he  cannot  do 
it  well.  Each  machine  requires  so  much  attention,  according  to  the 
nature  of  it,  and  if  too  few  or  too  many  laborers  are  set  to  work  with 
it  there  is  a  waste  of  labor. 

47.  SOME  RESULTS  OF  THE  LAW.  The  results  of  this  law  are 
of  the  utmost  importance  to  society.  It  is  because  this  great  law  is 
true  that  the  great  law  of  Malthus  is  tru-e.  If  the  earth  would  yield 
in  proportion  to  labor  put  upon  it,  and  do  so  continuously,  population 
would  not  increase  faster  than  the  food  supply.  Scientific  agriculture 
may  long  offset  the  working  of  the  law,  and  for  a  time  enable  man  to 


ELEMENTS  OF  ECONOMICS  7^ 

obtain  more  and  more  for  a  given  outlay  of  capital  and  labor.  But  if 
the  population  of  the  world  increases  as  fast  as  it  has  during  the  past 
hundred  years,  not  many  centuries  hence  the  capacity  of  the  soil  of 
the  whole  world  will  be  taxed  to  its  utmost,  and  no  scientific  im- 
provements could  possibly  destroy  the  workings  of  the  law  of  dimin- 
ishing returns.  Hence,  an  increasing  population  may  find  it  in- 
creasingly difficult  to  feed  itself.  But  we  do  not  need  to  look  into  the 
future  to  see  the  results  of  this  law;  for  the  increasing  cost  of  agri- 
cultural products  proves  that  the  law  is  now  at  work,  making*  it  harder 
for  the  lower  classes  to  get  a  living. 

The  law  of  diminishing  returns  as  applied  to  land  used  for  office 
buildings  or  factories  is  of  far  less  importance  to  society  than  the 
law  as  applied  to  agriculture.  It  might  mean  much  to  an  individual 
manufacturer  who  finds  it  necessary  to  buy  more  land  to  increase  the 
capacity  of  his  factory.  If  he  could  simply  keep  on  increasing  the 
height  it  might  be  much  cheaper.  And  since  it  would  be  cheaper,  the 
public  would  also  be  able  to  get  goods  cheaper,  if  the  manufacturer 
were  not  under  the  necessity  of  buying  more  land.  But  if  the  popula- 
tion of  the  United  States  should  be  doubled  or  quadrupled  during  the 
next  century,  it  would  not  be  difficult  to  get  land  enough  to  increase 
the  factories  in  proportion  to  the  increased  demand  for  goods,  for 
only  a  small  fraction  of  the  land  would  be  needed  for  factories.  But 
to  increase  the  land  used  in  agriculture  would  be  quite  a  different 
thing. 

The  law  of  diminishing  returns  as  applied  to  labor  also  has  grave 
consequences.  This  will  be  considered  more  fully  when  the  subject  of 
wages  is  reached,  hence  we  need  only  indicate  briefly  here  the  im- 
portance of  this  phase  of  the  law.  In  case  the  laboring  population  is 
increasing  faster  than  capital,  that  is,  the  tools  and  machinery  with 
which  laborers  must  work,  the  law  of  diminishing  returns  to  labor 
will  be  brought  into  operation  if  there  is  an  attempt  to  use  all  the 
labor  supply,  consequently,  wages  will  fall. 

48.  ORGANIZATION  OF  MARKETS.    A  fourth  phase  of  organ- 


80  ELEMENTS   OF   ECONOMICS 

ization  of  industry  relates  to  marketing  products.  The  discussion  of 
this  phase  of  efficiency  is  quite  recent.  Investigation  and  experiment 
show  that  there  is  immense  waste  in  present  methods  of  getting 
goods  from  producers  to  consumers.  Investigations  show  that  farm- 
ers get  about  half  the  price,  on  many  articles,  that  the  consumer 
pays.  One  investigation  conducted  in  the  year  1915  shows  that  in  a 
certain  community  the  farmers  ^received  18  ^/^  cents  a  pound  for  but- 
ter, and  the  consumer  paid  32  cents;  potatoes  cost  the  consumer  $1.10 
a  bushel  and  the  farmer  got  53  cents;  eggs  sold  for  25  cents  a  dozen 
to  the  consumer  and  the  farmer  got  11  cents;  sweet  corn  in  the  ear 
sold  for  40  cents  a  dozen  to  consumers  and  the  farmer  got  15  cents. 
When  it  costs  more  to  market  goods  produced  within  a  few  miles  of 
the  consumers  than  it  costs  to  produce  them,  it  would  seem  to  indi- 
cate that  som.ething  is  radically  wrong  with  the  system  of  marketing. 
In  the  fall  of  1915  fish  was  selling  in  the  private  markets  of  Wash- 
ington, D.  C,  at  prices  ranging  about  192  per  cent  higher  than  in  the 
Municipal  market.  On  the  whole,  those  engaged  in  the  mercantile 
trades  do  not  seem,  according  to  these  investigations,  to  be  making 
extra  high  profits.  The  conclusion  must  be,  therefore,  that  there  is 
a  great  social  waste  somewhere. 

Among  the  possible  causes  for  this  waste  two  are  especially  em- 
phasized. One  is  that  there  are  often  entirely  too  many  middlemen. 
The  jobbers  and  the  wholesalers  and  retailers  must  have  their  profits, 
and  sometimes  it  seems  that  no  real  social  service  is  rendered,  and 
hence,  many  goods  might  go  direct  from  producer  to  consumer.  This 
would  apply  especially  to  farm  and  garden  products  which  are  pro- 
duced near  the  place  of  consumption.  Another  cause  of  social  waste 
is  the  system  of  delivery  from  retailer  to  the  consumer.  Goods  are 
ordered  in  very  small  amounts,  quick  delivery  is  demanded,  and  sev- 
eral stores  cover  practically  the  same  territory.  The  result  is  that 
half  a  dozen  delivery  wagons  may  be  seen  most  any  time  covering 
about  the  same  portion  of  the  city,  each  carrying  about  a  wheelbar- 
row load  of  goods;  and  the  consumer  pays  the  cost  of  this  wasteful 


ELEMENTS   OF   ECONOMICS  81 

system. 

But  it  is  much  easier  to  find  fault  with  the  system  than  it  is  to 
find  a  remedy  for  these  faults.  In  the  mercantile  world  is  about  th-e 
only  field,  outside  of  farming,  where  competition  yet  prevails.  For 
the  last  century  or  more  the  world  has  relied  upon  competition  to  pro- 
duce social  and  economic  efficiency.  The  result  seems  a  little  dis- 
couraging. One  of  the  oldest  remedies  is  the  cooperative  store.  In 
England  this  idea  has  been  most  fully  developed.  Cooperative  retail 
stores  are  established  in  each  community, these  retail  stores  combine  to 
establish  wholesale  stores,  and  the  wholesale  stores  combine  to  es- 
tablish mills  and  factories  and  steamship  lines.  The  result  is  that  the 
majority  of  the  workingmen  in  England  and  Scotland  buy  the  major- 
ity of  their  goods  at  cooperative  stores  and  save  some  of  the  profits 
that  would  go  to  the  manufacturers,  wholesalers  and  retailers,  and 
get  their  goods  about  twenty  or  twenty-five  per  cent  cheaper  than  the 
competitive  price.  Other  countries  in  Europe  are  following  the 
English  example,  and  in  the  United  States  the  idea  is  beginning  to 
take  root,  especially  in  the  Northwest  among  the  Scandinavian  popu- 
lation, who  are  familiar  with  it  in  their  own  country.  A  newer  remedy 
suggested  is  the  municipal  market,  which  has  been  established  in  sev- 
eral cities.  Possibly  a  combination  of  the  two  plans  would  be  ad- 
vantageous, the  municipal  market  for  the  garden  produce  and  co- 
operative stores  for  more  staple  goods. 

The  importance  of  bringing  about  a  more  economical  method  of 
marketing  is  coming  to  be  recognized  and  various  agencies  are  at 
work  on  the  farm-to-consumer  problem.  Several  states  have  organ- 
ized bureaus  to  look  after  this  work,  local  post  office  authorities  in 
some  cities  have  entered  the  same  field,  and  within  the  last  few 
months,  under  the  stimulus  of  the  paiicel  post  and  the  reduction  of 
rates  by  the  Interstate  Commerce  Commission,  the  large  express 
companies  have  entered  the  field  on  a  large  scale.  Buying  clubs  are 
organized  in  cities,  marketing  experts  are  sent  out  to  instruct  the 
farmers,  and  goods  are  carried  direct  from  the  farm  to  the  consumer. 


82  ELEMENTS   OF   ECONOMICS 

CHAPTER  VI. 

Problems  of  Production. 

49.  INTRODUCTION.  In  our  last  chapter  we  were  concerned 
mainly  with  the  great  principles  that  govern  the  efficiency  of  the 
productive  forces  of  a  nation.  Incidentally,  several  applications  of 
these  principles  were  pointed  out,  showing  their  bearing  upon  human 
welfare.  Many  large  practical  problems  of  production  were  only 
hinted  at  or  omitted  for  the  sake  of  brevity  in  treating  the  theoreti- 
cal phases  of  the  subject.  In  the  present  chapter  we  shall  consider 
several  of  these  great  practical  problems  that  face  us  as  citizens  and 
helpers  in  society. 

These  problems  of  production  are  concerned  largely  with  the 
conservation  of  our  natural  resources.  Nature  has  bestowed  upon  us 
abundance  of  resources.  Our  forefathers,  in  America,  being  so  few 
in  numbers  and  facing  a  vast  continent  of  apparently  inexhaustable 
wealth,  fell  into  careless  habits  in  their  use  of  the  resources  of  the 
country  without  thought  of  future  generations.  As  a  result,  our  re- 
sources begin  to  show  signs  of  exhaustion  while  our  nation  is  yet 
young.  Within  the  last  twenty  years  there  has  been  an  awakening  to 
the  fact  that  this  usekss  waste  must  be  stopped,  that  our  soil,  our 
forests,  and  the  elemental  resources  of  our  country  may  be  trans- 
mitted unimpaired  to  future  generations,  and  thus  preserve  the  foun- 
dation of  our  future  greatness,  material  and  intellectual. 

50.  FOREST  PRESERVATION.  The  most  notable  example  of 
thoughtless  waste  is  the  destruction  of  our  forests.  When  America 
was  first  settled,  the  eastern  half  of  the  country  was  one  vast  wilder- 
ness. Most  of  this  was  burned  to  get  it  out  of  the  way.  And  still 
the  destruction  continues,  but  from  different  causes.  It  was  estimated 
a  few  years  ago  that  our  forests  would  be  gone  in  thirty  years,  unless 
the  useless  waste  were  checked.  The  two  great  causes  of  the  de- 
struction of  our  forests  are  wasteful  methods  of  lumbering  and  forest 
fires.    Great  tracts  of  forest  lands  are  bought  by  the  lumbering  com- 


ELEMENTS  OF  ECONOMICS  83 

panies  who  have  no  interest  in  preserving  the  young  trees  for  a 
future  generation.  As  a  result,  everything  is  cut  that  is  worth  cut- 
ting, big  and  little,  and  the  underbrush  left  scattered  over  the 
ground.  Fires  get  started  in  the  brush  when  dry  and  the  young 
trees  are  destroyed.  Fires  also  break  out  in  foirests  not  yet  cut  and 
immense  tracts  are  burned  over.  Instead  of  replanting  these  lands 
with  trees,  the  companies  sell  them  cheap  to  individuals  who  culti- 
Tate  them.  In  many  if  not  in  most  cases  the  land  is  better  adajpted 
to  timbett*  growing  than  to  farming,  but  few  wish  to  wait  for  a  forest 
to  grow  before  realizing  on  their  investment. 

The  evils  resulting  from  this  destruction  of  our  forests  are  many 
and  serious.  Lumber  is  getting  scarce  and  high  in  price.  On  the  hill 
sides,  the  soil  is  washed  away  and  lodged  in  the  rivers,  where  it  in- 
terferes with  navigation.  With  the  destruction  of  the  forests  around 
the  head  waters  of  our  rivers,  in  the  Rocky  Mountains  and  in  the 
Appalachians,  and  in  the  northern  pine  forest  states,  the  snow  melts 
early  in  the  spring  and  the  waters  rush  down  into  the  valleys,  causing 
destructive  floods.  And  the  rains  of  early  spring  also  rush  down  the 
hill  sides  causing  floods,  because  the  leaves,  roots  and  loose  soil  no 
longer  take  up  the  moisture  and  allow  it  to  work  its  way  gradually 
down  into  the  valleys,  thus  steadying  the  flow  of  streams.  When  the 
forests  are  destroyed,  rivers  are  at  times  swollen  torrents  and  at 
times  nearly  dry.  The  fourfold  result  is  hindrance  to  navigation,  a 
destruction  of  life  and  property  in  floods,  the  conversion  of  fertile 
land  into  swamps,  and  the  loss  of  water  power,  for  there  must  be  a 
steady  flow  of  water  to  afford  continuous  water  power.  Indirectly, 
the  work  of  irrigation  is  made  more  difficult,  since  it  requires  more 
work  to  hold  the  water  back  by  dams  when  it  all  comes  down  at  once. 
Thus  a  whole  group  of  problems  is  bound  up  together,  forest  restora- 
tion and  preservation  being  a  main  element  in  the  solution  of  all  of 
them. 

The  people  of  this  country  are  beginning  to  realize  the  necessity 
of  preserving  our  forests  yet  remaining  and  of  restoring  them  on 


84  ELEMENTS   OF   ECONOMICS 

lands  better  adapted  to  raising  trees  than  other  things.  Most  of  the 
states  are  showing  an  active  interest  in  increasing  forest  areas,  and 
in  over  thirty  states  laws  have  been  passed  to  encourage  tree  plant- 
ing. Reforested  lands  are  sometimes  exempt  from  taxation  for  fifty 
years,  and  elaborate  systems  are  devised  for  the  prevention  of  for- 
est fires.  Fourteen  states  are  actively  cooperating  with  the  federal 
government  in  preserving  the  forests  at  the  head  waters  of  navi- 
gable streams.  Even  private  owners  of  forests  are  awakening  to  the 
need  of  preserving  forests,  and  in  Montana,  Idaho,  Oregon  and  Wash- 
ington alone  over  20,000,0€0  acres  of  private  forest  lands  are  patroll- 
ed to  protect  them  from  fires.  The  federal  government  is  doing 
much  to  restore  forests  on*  lands  suitable  for  timber,  and  its  efforts 
are  especially  directed  towards  the  reforesting  of  the  lands  around 
the  head  waters  of  navigable  rivers.  In  the  Rocky  Mountains  and  the 
Far  West  region  are  several  forest  reserves.  These  forests  are  care- 
fully guarded  from  fires  and  the  cutting  of  the  trees  is  under  the 
supervision  of  government  officials.  Forest  reserves  are  also  being 
established  in  the  White  and  Appalachian  Mountains,  about  1,000,000 
acres  having  been  purchased  under  the  Weeks  Act.  This  vigorous 
and  united  activity  of  lumber  companies,  the  states  and  the  federal 
government  ought  soon  to  check  the  further  destruction  of  our  forests 
and  in  course  of  time  reestablish  them  on  a  firm  and  enduring  basis. 
The  total  area  now  included  in  National  Forest  Reserves  amounts  to 
over   186,000,000  acres. 

51.  FLOODS.  Another  serious  problem  is  the  prevention  of  the 
annual  floods  which  inundate  large  tracts  of  lowlands.  Hundreds  of 
lives  are  lost  annually  and  it  is  estimated  that  the  damage  to  property 
amounts  to  about  $50,000,000  yearly.  Cities  are  inundated,  cellars 
are  filled  with  water,  buildings  are  damaged  or  destroyed,  bridges 
and  railway  embankments  are  swept  away,  live  stock  on  the  farms  is 
destroyed,  and  the  lowest  lands  are  so  late  in  drying  out  that  the 
crop  yield  is  considerably  lessened. 

Both  the  Atlantic  and  the  Pacific  slopes  experience  these  floods. 


ELEMENTS   OF   ECONOMICS  85 

but  the  Mississippi  Valley  suffers  most.  The  wide-spreading  branches 
of  the  Father  of  Waters  gather  the  water  from  the  snow  and  rain  of 
half  a  continent  and  annual  high  water  is  inevitable.  But  when  the 
snows  of  winter  are  heavy  and  spring  rains  come  in  great  sheets,  as 
they  did  over  Ohio  and  Indiana  in  1913,  great  floods  result. 

From  the  nature  of  the  causes  of  these  floods  it  would  seem  im- 
possible to  prevent  them  entirely,  and  all  that  can  be  done  is  to  de- 
crease the  height  of  the  tide.  Reforestation  of  the  watersh-eds  and 
building  of  great  reservoirs  would  hold  back  the  waters,  thus  lessen- 
ing the  height  of  the  flood;  and  channel  deepening  would  enable  the 
rivers  to  carry  a  larger  volume  of  water.  But  all  these  remedies  com- 
bined would  probably  not  be  adequate.  Congress  has  made  feeble 
attempt  to  build  levees  along  the  lower  Mississippi,  which  help  a 
little;  but  they  are  not  high  enough  nor  strong  enough  to  hold  the 
greatest  floods.  And  practically  nothing  has  been  done  on  the  Upper 
Mississippi  or  its  branches.  The  problem  is  still  unsolved.  Some 
have  suggested  a  system  of  dykes  on  the  Upper  Mississippi  and  its 
branches  and  a  great  spillway  from  Cairo,  Illinois,  to  the  Gulf.  It  is 
suggested  that  this  spillway  be  ten  miles  wide  or  more,  with  dykes 
high  enough  to  hold  the  waters  of  the  greatest  possible  flood,  and 
with  cross  dykes  or  dams  every  two  or  three  hundred  miles.  At  these 
dams  electric  plants  could  be  established,  the  imprisoned  water  in  the 
spillway  furnishing  the  water  power,  and  electric  power  could  be 
supplied  to  the  whole  region  of  the  lower  Mississippi  for  lighting, 
transportation  and  manufacturing.  But  whatever  is  done,  some  uni- 
form plan  under  the  control  of  the  federal  government  is  necessary. 
Wherever  local  communities  have  undertaken  the  solution  of  the 
problem  space  between  embankments  have  been  made  too  narrow  in 
order  to  gain  valuable  land,  and  as  a  result  the  height  of  the  floods 
have  been  increased  above  the  points  where  the  channel  has  been 
narrowed. 

52.  WATERWAYS.  The  United  States  has  a  splendid  oppor- 
tunity for  internal  waterways.    With  25,000  miles  of  rivers  and  lakes 


ELEMENTS  OF  ECONOMICS 


that  could  be  made  navigable,  and  with  lands  suitable  for  digging- 
canals  to  connect  the  river  systems,  this  country  could  easily  take 
front  rank  among  the  nations  in  the  efficiency  of  its  internal  water- 
ways. But  as  yet  we  have  no  general  system  of  internal  water 
transportation.  Transportation  by  water  costs  about  one-third  as 
much  as  transportation  by  rail,  including  original  cost  and  the  up- 
keep. We  ara  just  beginning  to  realize  our  opportuninties  and  vast 
systems  of  waterways  are  being  discussed  and  beginnings  have  been 
made.. 

An  ideal  system  of  inland  waterways  would  include  (1)  Lakes- 
to-the-Gulf  waterway  from  Chicago  to  New  Orleans,  (2)  improve- 
ment of  the  main  branches  of  the  Mississippi  so  as  to  connect  with 
the  main  trunk  from  Chicago  to  New  Orleans,  (3)  canals  connecting 
the  Ohio  with  the  Great  Lakes,  (4)  the  improvement  of  the  Erie  Canal 
route,  (5)  an  inland  waterway  parallel  with  the  coast  from  Boston 
to  the  Mexican  border,  cutting  across  the  peninsula  of  Florida,  (6) 
the  improvement  of  the  Columbia  River,  and  (7)  the  Panama  CanaL 
Such  a  system  would  make  seaports  of  Chicago,  St.  Louis,  Min- 
neapolis and  St.  Paul,  Duluth,  Cincinnatti,  Buffalo,  and  other  Inland 
cities.  The  special  advantages  of  the  inland  waterway  along  the 
Gulf  and  Atlantic  Coasts  would  be  the  avoidance  of  the  dangers  from 
the  stormy  sea  and  the  immense  shortening  of  the  distance  between 
the  different  cities  along  the  coast.  The  Panama  Canal  will  give 
cheaper  transportation  between  the  Atlantic  and  the  Pacific  coasts, 
between  North  and  South  America,  and  bring  the  United  States  into 
closer  communication  with  all  other  continents. 

Why  have  we  neglected  our  opportunity?  For  several  reasons- 
The  rapid  development  of  railways  before  the  waterways  were  de- 
veloped checked  the  latter  movement.  It  costs  less  to  build  railroads 
than  to  build  canals  and  canalize  rivers,  and  the  country  took  the 
line  of  least  resistance.  In  recent  years  the  railroads  have  opposed 
the  development  of  a  system  of  waterways,  but  to  what  extent  this 
influence  has  retarded  the  progress  of  waterways  cannot  be  definitely 


ELEMENTS   OF   ECONOMICS  87 

known.  The  wasteful  and  unbusinesslike  financial  methods  of  Con- 
gress has  stood  in  the  way.  From  the  beginning  of  the  present  gov- 
ernment of  the  United  States  up  to  the  end  of  the  fiscal  year  1913 
Congress  has  appropriated  the  sum  of  $746,927,946.61  for  the  im- 
provement of  rivers  and  harbors.  If  half  that  amount  had  been 
spent  in  the  proper  way  the  country  would  have  had  a  fairly  good 
system  of  waterways.  Instead  of  selecting  a  few  great  projects  and 
putting  them  through  so  that  the  country  might  get  the  benefit  of 
their  use,  Congress  has  acted  upon  the  principle  that  each  Congres- 
sional district  must  receive  some  of  Uncle  Sam's  money.  Innumer- 
able little  .projects  all  over  the  country  have  been  undertaken  and 
millions  of  dollars  have  been  spent  in  dredging  harbors  and  improv- 
ing rivers  where  there  is  little  or  no  commerce,  and  the  only  tangible 
result  of  a  large  part  of  this  expenditure  has  been  to  furnish  jobs  to 
the  political  friends  of  Congressmen.  And  the  same  "pork-barrel" 
methods  of  appropriation  have  been  followed  in  selecting  and  carry- 
ing forward  the  really  important  projects.  Under  the  pressure  of 
public  condemnation  and  the  vigorous  protests  of  our  presidents  since 
the  Civil  War,  Congress  is  now  going  about  its  large  projects  with 
more  businesslike  wisdom  than  in  previous  years.  Instead  of  spread- 
ing out  its  efforts  all  over  the  Mississippi  River  work  is  now  concen- 
trated on  certain  portions  so  as  to  get  them  finished. 

Portions  of  the  ideal  plan  sketched  above  have  been  completed 
and  most  of  the  other  portions  are  under  way.  The  Panama  Canal 
is  now  completed.  The  canalization  of  the  Columbia  from  its  mouth 
to  Lewiston,  Idaho,  is  under  way.  The  great  New  York  State  Barge 
Canal  is  about  two-thirds  finished.  The  Mohawk  River  is  to  be 
canalized  to  a  point  near  Rome,  from  there  the  string  of  lakes  and 
rivers  is  utilized  until  the  old  canal  is  reached  in  the  western  part 
of  the  state,  and  th^  remainder  of  the  course  is  along  the  old  route. 
The  new  canal  will  be  able  to  accommodate  barges  of  3,000  tons 
capacity  and  it  m^kes  possible  twenty-five  times  as  much  traffic 
as  the  old  canal  could  handle.     The  Ohio  River  is  to  be  made  navi- 


88  ELEMENTS   OF   ECONOMICS 

gable  for  small  boats  by  the  construction  of  54  dams  and  locks  be- 
tween Pittsburg  and  Cairo,  and  11  dams  and  locks  are  now  com- 
pleted. The  improvement  of  the  channel  of  the  Mississippi  from 
Minneapolis  to  the  Gulf  is  under  way,  dams,  dredging,  and  levees 
being  the  means  employed.  The  inland  waterway  along  the  Atlantic 
and  Gulf  Coasts  is  well  under  way,  several  links  in  the  chain  having 
been  completed.  The  Cape  Cod  Canal  from  Cape  Cod  Bay  to  Buz- 
zard's Bay  is  finished  and  will  shorten  the  distance  between  New 
York  and  Boston  about  70  miles.  The  Chesapeake  and  Albemarle 
Canal  from  Norfolk,  Va.,  to  Beaufort,  N.  C,  is  being  constructed 
by  the  federal  government.  A  chain  of  waterways  is  being  con- 
structed the  entire  length  of  the  Gulf  Coast,  excepting  along  the 
Florida  peninsula.  Thus  it  seems  that  at  last  the  United  States  is 
to  have  a  system  of  inland  waterways  commensurate  with  its  needs. 

53.  GOOD  ROADS.  The  three  main  means  of  transportation 
are  railroads,  wateirways  and  roads.  Railroads  have  been  well  de- 
veloped by  private  companies,  and  the  great  railway  problem  is 
how  to  control  them  for  the  public  interest.  Our  waterways  problem 
is  on  the  road  to  solution.  But  the  problem  of  good  roads  is  yet 
confronting  us,  though  some  progress  is  being  made.  With  all  our 
nervous  energy  in  getting  rich  we  have  neglected  one  of  the  most 
essential  sources  of  wealth,  good  roads,  and  the  United  States  has 
poorer  roads  than  any  of  the  great  nations  of  western  Europe. 

The  causes  of  this  backward  condition  are  various.  The  nation 
is  yet  young  and  we  have  been  spreading  rapidly  westward  over  wild 
territory.  Under  such  conditions  road  building  must  of  necessity  wait 
for  the  country  to  develop  to  some  extent.  To  build  anything  but 
dirt  roads  is  costly,  and  a  new  country  may  have  plenty  of  natural 
resources,  but  it  takes  time  to  accumulate  wealth.  Another  reason 
for  not  building  good  roads  is  the  lack  of  material  in  most  parts 
of  the  country,  and  paving  material  must  be  shipped  long  distances. 
A  third  great  cause  for  the  poor  condition  of  our  roads  is  that  until 
recently  road  building  and  maintenance  has  been  under  the  exclusive 


ELEMENTS  OF  ECONOMICS  89 

control  of  local  governments,  the  township  or  the  county.  We  might 
have  had  at  least  good  dirt  roads,  if  th-ere  had  been  proper  coopera- 
tion among  the  different  governments,  national,  state,  and  local.  But 
farmers  are  usually  busy  and  the  roads  have  always  been  much 
neglected.  If  one  district  neglects  its  roads,  there  is  not  much  use 
for  the  other  adjoining  districts  to  build  good  roads.  Hence,  there 
has  been  a  tendency  for  the  roads  to  sink  to  the  level  of  th-e  poorest. 
To  get  a  good  system  of  roads  all  concerned  must  pull  together. 
Some  roads  should  be  great  national  highways  leading  from  one  end 
of  the  counto-y  to  the  other;  others  should  branch  out  from  these 
and  connect  the  main  cities  and  social  centers;  local  roads  serve  as 
the  feeders.  It  is  plain,  therefore,  that  all  grades  of  government, 
national,  state,  county  or  township,  should  cooperate.  The  main  roads 
cost  more  than  the  local  roads,  and  the  burden  must  be  born  not 
by  the  local  community  but  by  the  nation  and  the  states. 

The  advantages  of  good  roads  are  many  and  well  recognized. 
The  most  obvious  advantage  is  the  cheapening  of  the  cost  of  trans- 
portation. It  is  estimated  that  the  cost  of  getting  goods  from  the 
farm  to  the  railroads  in  the  United  States  is  greater  than  the  cost  of 
railroad  transportation.  Easier  means  of  communication  and  trans- 
portation enable  the,  country  people  to  get  together  more  and  thus 
reduce  the  loneliness  of  rural  life;  the  movement  for  consolidation  of 
rural  schools  would  be  aided,  since  one  of  the  main  obstacles  to  con- 
solidation is  the  difficulty  of  getting  the  children  to  and  from  school 
every  day.  The  "Stay  on  the  farm''  and  the  "Back  to  the  farm"  move- 
ments would  be  helped  along,  since  country  life  would  be  more  profit- 
able and  more  attractive  with  good  roads  to  facilitat-e  transportation 
for  economic,  social,  educational,  and  religious  purposes. 

It  is  encouraging  to  observe  the  nation-wide  awakening  to  the 
need  of  good  roads.  The  automobile,  rural  mail  delivery,  and  agi- 
tation by  the  wide-awake  portion  of  the  community  have  at  last 
moved  the  masses.  "Good  roads"  days  are  set  aside  for  public  ob- 
servance by  w^orking  the  roads,  commissions  of  inquiry  are  being  ap- 


90  ELEMENTS   OF   ECONOMICS 

pointed  to  make  a  scientific  study  of  the  whole  problem,  in  its  finan^ 
cial,  political  and  engineering  phases,  and  state  laws  are  being  enacted 
giving  the  state  governments  a  larger  voice  in  road  affairs.  The 
federal  government  has  built  several  small  bits  of  road  in  different 
parts  of  the  country  to  serve  as  examples,  and  certain  principles  of 
roadmaking  have  been  worked  out.  It  has  been  demonstrated,  for 
example,  that  it  is  better  to  have  a  long,  level  road  around  a  hill  than 
a  short,  steep  graded  road  over  a  hill.  It  has  been  demonstrated  also 
that  in  most  cases,  for  a  country  road,  a  dirt  road  is  hard  enough  if 
it  is  kept  dry;  hence  if  anything  but  a  dirt  road  is  to  be  built  the  main 
thing  is  to  make  a  waterproof  covering  or  "roof."  The  very  best  and 
most  expensive  material  may  be  used  to  little  purpose  if  it  is  not 
waterproof;  for  if  water  gets  through  to  the  dirt  foundation  the  dirt 
becomes  soft  and  the  paving  becomes  uneven  or  broken  and  is  worse 
than  a  poor  dirt  road.  The  general  principles  of  the  new  state-road 
laws  are  the  establishment  of  state  road  commissions  to  cooperate 
with  county  officials  in  building  certain  roads,  the  sharing  of  the 
burden  of  the  work  jointly  by  state  and  county,  and  the  general  su- 
pervision of  the  work  of  construction  by  state  officials.  Several  bills 
have  been  introduced  into  Congress  authorizing  national  aid  in  road 
making;  but  the  feeling  that  such  matters  belong  to  the  states,  and 
that  the  "pork-barrel"  spirit  would  defeat  the  main  purpose  of  na- 
tional aid  have  thus  far  prevented  the  national  government  from 
doing  anything  in  this  direction. 

54.  IRRIGATION.  Another  great  problem  of  production  is  the 
utilization  of  large  tracts  of  our  arid  lands.  With  a  few  local  ex- 
ceptions, the  whole  region  west  of  the  hundredth  meridian  is  arid 
and  for  most  crops  needs  irrigation.  This  region  comprises  about 
half  the  area  of  the  country.  But  owing  to  the  limited  amount  of 
moisture  from  rain  and  snow  only  a  small  fraction  of  this  vast  region 
can  be  irrigated.  Some  can  be  irrigated  from  artesian  wells,  but 
how  much  is  not  definitely  known.  It  is  estimated  that  about  150,- 
000,000  acres  or  235,000  square  miles  can  be  irrigated  ftom  streams.. 


ELEMENTS   OF   ECONOMICS  91 

The  irrigated  lands  are  very  fertile  and  40  acres  makes  a  good  sized 
farm,  hence,  there  will  be  room  for  4,000,000  farms,  or  about  20,000,- 
000  people,  not  including  those  in  villages  and  cities  which  will  grow 
up.  Though  only  a  small  proportion  of  our  arid  lands  can  be  irrigated, 
the  amount  is  by  no  means  small,  being  larger  than  either  France  or 
Germany.  In  1910  about  20,000,000  acres  were  ready  for  irrigation 
from  streams.  About  40  per  cent  of  this  was  irrigated  by  private 
individuals,  16  per  cent  by  irrigation  companies,  32  per  cent  by  co- 
operation among  the  landowners,  6  per  cent  by  state  governments 
and  6  per  cent  by  the  federal  government. 

The  irrigation  of  our  arid  lands  is  a  national  problem,  and  its 
general  solution  should  have  been  under  the  control  of  the  federal 
government.  Private  individuals  cannot  afford  to  construct  reser- 
voirs and  ditches  on  a  larga  scale,  and  cooperation  on  a  large  scale 
cannot  be  undertaken  until  the  country  is  fairly  well  settled.  More- 
over, if  left  to  private  enterprise  wasteful  methods  are  employed  and 
the  amount  of  land  that  can  be  irrigated  is  much  smaller  than  it 
would  be  if  the  water  were  used  economically.  Litigation  also  results, 
for  late  settlers  go  higher  up  the  streams  and  divert  the  water,  in 
wasteful  fashion,  upon  the  lands  above,  leaving  an  insufficient  amount 
for  those  who  have  been  using  the  water.  If  corporations  get  control 
of  the  water  rights  a  monopoly  is  created,  and  extortionate  rates  for 
water  are  charged.  Even  states  cannot  properly  control  the  matter, 
since  most  of  the  main  streams  that  furnish  the  water  run  through 
more  than  one  state,  and  litigation  among  the  states  results.  If  all 
these  difficulties  had  been  foreseen  provision  might  have  been  made 
for  supervision  by  the  federal  government  before  it  disposed  of  its 
lands.  In  1902  the  federal  government  entered  the  field.  A  law  was 
passed  setting  aside  the  proceeds  of  the  sale  of  public  lands  to  be  used 
in  constructing  irrigation  works.  Thus  a  continuous  fund  for  irriga- 
tion is  created  and  maintained.  When  irrigated  lands  are  sold  the 
proceeds  go  into  the  fund  for  irrigating  more  lands. 

The  government  is  pursuing  a  liberal  policy  that  will  make  of 


^2  ELEMENTS  OF  ECONOMICS 

the  irrigated  regions  a  land  of  small  farms.  The  land  is  sold  only  to 
actual  settlers,  in  tracts  ranging  from  10  to  160  acres,  according  to 
the  value  of  the  land  and  what  it  is  suited  for,  at 'a  nominal  sum  of 
from  50  cents  to  $1.50  an  acre  and  whatever  it  costs  to  irrigat-e  it. 
This  includes  perpetual  water  rights.  The  average  cost  thus  far  is 
about  $16.00  per  acre  for  constructing  reservoirs  and  ditches  and 
$1.07  for  maintenance.  The  cost  of  the  government  projects,  however, 
is  much  greater  than  that,  bemg  about  $68.00  an  acre,  because  lands 
easiest  to  irrigate  were  the  first  to  be  taken  by  private  individuals, 
and  because  of  the  more  permanent  character  of  the  public  irrigation 
works.  The  average  value  of  the  crop  on  the  irrigated  lands  in  1910 
was  $25.00  an  acre,  which  shows  that  money  spent  in  reclaiming  our 
^arid  lands  is  well  invested. 

Irrigation  and  "dry  farming"  are  converting  the  land  of  the  cow- 
boy, the  buffalo,  and  the  miner  into  a  rich  agricultural  country  with 
some  advantages  other  agricultural  sections  cannot  enjoy.  The  rich- 
ness of  the  land  and  the  assured  water  supply  make  it  possible  for  a 
small  tract  of  land  to  support  a  family  in  good  condition.  The  density 
of  the  population  enables  it  to  secure  many  of  the  advantages  of  city 
life,  without  its  nervous  strain,  filth,  and  overcrowding.  School  sys- 
tems may  be  established  rivaling  those  of  the  cities;  roads  can  be 
well  paved  and  the  dam  near  by  will  furnish  power  for  electric  light 
and  transportation.  On  the  whole,  the  industrial,  political,  and  intel- 
lectual life  of  the  Far  West  will  be  transformed  and  it  will  become 
one  of  the  most  intelligent  and  progressive  portions  of  the  country. 

55.  SWAMP  LANDS.  Another  great  source  of  national  wealth 
lies  in  our  swamp  lands.  We  have  done  much  less  to  utilize  this 
source  of  wealth  than  has  been  done  in  the  arid  regions.  Most  of  the 
land  has  passed  into  private  hands,  hence  there  has  not  been  the  op- 
portunity for  the  government  to  take  the  initiative,  drain  the  lands, 
and  sell  them.  For  private  individuals  to  do  anything  worth  while, 
cooperation  among  the  owners  is  necessary.  This  is  being  done  to 
some  extent,  but  to  reclaim  the  main  part  of  the  swamp  lands  action 


ELEMENTS  OF  ECONOMICS  93 

by  the  state  and  in  some  cases  by  the  nation  is  necessary.  Not  only 
must  great  ditches  be  dug  but  the  annual  floods  which  inundate  the 
lowlands  must  be  prevented. 

There  are  in  the  United  States  about  75,000,000  acres  of  swamp 
lands  that  could  be  drained.  The  most  of  this  land  lies  along  the 
Missippi  River,  around  the  Great  Lakes,  in  Florida,  and  in  the  States 
on  the  Pacific  Coast.  The  land  is  extremely  fertile  and  would  support 
a  farming  population  of  at  least  10,000,000.  It  costs  form  S6  to  $9 
an  acre  to  drain  the  land  and  the  valu-e  of  the  crop  would  be  at  least 
$50.00  an  acre.  Hence  the  cost  is  about  half  that  for  irrigation  and 
the  value  of  the  crop  is  about  twice  as  great  as  that  of  irrigated 
lands.  Evidently  money  spent  in  swamp  drainage  would  be  a  good 
investment.  In  addition  to  the  great  increase  of  our  food  supply, 
drainage  of  our  swamps  would  increase  the  healthfulness  of  these 
regions  and  of  the  country  around  them.  Several  states  have  within 
the  last  few  years  passed  laws  on  the  subject  of  swamp  drainage  and 
appointed  commissions  to  take  charge  of  the  drainage  works. 

56.  SCIENTIFIC  FARMING.  One  of  the  most  important  prob- 
lems of  the  day  is  how  to  improve  our  methods  in  agriculture.  There 
is  much  need  of  such  a  study,  for  our  soil  is  rapidly  becoming  ex- 
hausted by  unscientific  methods  of  cultivation.  Abundant  proof  of 
this  exhaustion  is  found  in  the  large  amount  of  land  formerly  under 
cultivation  that  is  now  abandoned.  Any  traveller  in  the  older  sec- 
tions of  the  country  can  find  in  any  community  many  abandoned 
farms.  According  to  the  census  reports  the  amount  of  unimproved 
land  in  New  England  and  New  York  increased  from  14,000,000  acres 
in  1880  to  19,000,000  acres  in  1900.  In  those  seven  states  about  30,- 
000,000  acres  were  under  cultivation  in  1880  and  only  23,000,000 
acres  in  1900,  which  shows  a  loss  of  about  23  per  cent  in  twenty  years. 

Some  writers  have  attempted  to  show  recently  that  our  soil  is 
not  being  exhausted,  because,  they  claim,  there  has  been  a  slight  in- 
crease in  the  yield  per  acre  of  most  crops  in  the  United  States  during 
the  past  ten  or  fifteen  years.     But  the  rise  in  prices  during  those 


94  ELEMENTS  OF  ECONOMICS 

years  would  naturally  lead  to  more  intensive  cultivation,  and  in  that 
case  an  increased  yield  per  acre  would  not  prove  that  more  intelligent 
methods  were  used  or  that  the  soil  is  not  being  slowly  exhausted.  In 
the  second  place,  there 'has  been  no  increase  in  the  yield  per  acre  of 
the  great  staple  crops  during  the  last  half  century.  The  average 
yield  of  wheat  during  the  ten  year  period,  1866-75,  was  11.9  bushels 
per  acre,  and  for  the  ten  year  period,  1901-1910,  13.9  bushels  per  acre. 
The  average  yield  of  oats  for  the  two  periods  was  28.1  bushels  and 
29.7  bushels  respectively;  of  rye,  13.6  bushels  and  16.1  bushels;  of 
harley,  23.1  and  26  bushels  respectively.  These  four  crops  show  an 
increase  of  from  one  and  one-half  to  three  bushels  per  acre,  a  very 
small  increase  when  one  considers  the  great  improvements  in  farm 
machinery.  On  the  other  hand,  the  yield  of  corn,  whose  acreage  is 
nearly  twice  that  of  the  other  four  crops  combined,  declined  about 
two  bushels  per  acre,  being  28  bushels  per  acre  for  the  first  perilod 
and  25.9  bushels  for  the  second.  The  net  result  seems  to  be  that  there 
has  been  no  general  increase  or  decrease  in  the  yield  per  acre  during 
the  last  half  century,  in  spite  of  th-e  improvements  in  farm  machinery 
and  the  stimulus  of  rising  prices  during  the  last  fifteen  years,  which 
would  naturally  lead  to  more  intensive  cultivation. 

There  are  at  least  four  great  causes  of  the  exhaustion  of  our 
soil.  (1)  The  abundance  and  cheapness  of  the  land  led  to  extensive 
rather  than  intensive  cultivation.  (2)  Increasing  amount  of  tenant- 
farming.  A  tenant  naturally  has  little  interest  in  maintaining  intact 
the  producive  powers  of  the  soil.  His  purpose  is  to  get  as  much  out  of 
it  as  possible  during  the  short  time  he  has  possession  of  it.  Conse- 
quently, the  soil  is  "mined"  rather  than  cultivated.  (3)  During 
slavery  days  the  soil  of  the  South  became  exhausted  because  of  the 
wasteful  methods  pursued.  But  one  or  two  great  crops  were  culti- 
vated, no  rotation  of  crops  was  possible,  no  fertilizers  were  used,  and 
when  one  piece  of  land  became  exhausted  it  was  abandoned  and  an- 
other piece  taken  under  cultivation.  (4)  The  individual  farmer  does 
mot  lose  very  much  by  the  slight  exhaustion  of  the  soil,  when  it  is 


ELEMENTS  OF  ECONOMICS  95 

widespread,  because  the  rise  in  the  prices  of  th-e  products  will  make 
nip  for  shortage  in  the  yield.  Hencfe,  the  non-agricultural  portion  of 
the  community  bears  the  chief  burden  of  the  exhaustion  of  the  soil, 
:and  the  farmers  are  willing  to  pursue  their  easy-going  ways  and  their 
unscientific  methods. 

The  general  results  of  this  exhaustion  of  the  soil  are  the  rise  in 
prices  and  the  decline  in  the  relative  importance  of  the  United  States 
as  a  source  of  the  world's  food  supply.  The  rise  in  prices  has  been 
produced  by  other  causes  also,  especially  the  increase  in  the  supply 
of  gold  and  the  increase  in  population,  which  makes  it  necessary  to 
bring  into  cultivation  lands  more  distant  from  the  main  markets.  But 
investigators  are  pretty  well  agreed  that  the  exhaustion  of  our  soil 
is  playing  an  important  part  in  the  rise  of  price  of  agricultural 
products.  The  second  result  is  shown  by  our  imports  and  exports  of 
food  stuffs.  In  1900  the  United  States  exported  $545,473,000  worth 
of  food  stuffs  and  imported  $230,916,000  worth;  in  1913  the  exports 
amounted  to  $502,094,000  and  imports,  $406,000,000.  In  other  words, 
our  exports  of  food  stuffs  actually  decreased  while  our  imports 
nearly  doubled.  Formerly  we  were  one  of  the  world's  chief  sources 
of  supply  for  bread  stuffs  and  meat;  but  during  the  last  few  years 
we  have  begun  to  import  meat.  The  rapid  increase  in  our  population 
is  to  a  large  extent  responsible  for  this  sudden  change  in  our  economic 
position  in  the  world's  markets,  because  the  increase  in  population 
has  been  chiefly  urban.  But  with  our  naturally  fertile  soil  this  coun- 
try could  easily  support  a  population  several  times  as  large  as  ours, 
with  proper  methods  of  cultivation,  and  the  shortage  in  food  supply 
that  threatens  us  in  the  near  future  is  unnecessary.  It  is  this  situa- 
tion that  is  greatly  stimulating  the  movements  for  more  scientific 
agriculture. 

57.  GOVERNMENT  AGENCIES  FOR  STUDYING  AGRICULT- 
URE. Th-e  farmers  have  done  much  of  their  own  initiative  in  intro- 
ducing more  scientific  agriculture,  but  the  national  and  state  gov- 
ernments, viewing  the  subject  from  the  standpoint  of  national  pros- 


96  ELEMENTS  OF  ECONOMICS 

perity  for  all  classes,  have  undertaken  the  task  of  studying  agriculture 
and  of  disseminating  the  knowledge  among  the  farmers,  in  the  hope 
that  self-interest  will  prompt  them  to  apply  the  knowledge  gained. 
This  work  affords  a  good  example  of  social  cooperation;  for  the  in- 
dividual farmer  could  not  possibly  do  what  the  national  and  state 
governments  are  doing  for  him. 

The  main  governmental  agencies  for  studying  agriculture  and 
disseminating  the  knowledge  are  (1)  the  National  Department  of  Ag- 
riculture, (2)  state  agricultural  colleges,  (3)  experiment  stations,  and 
(4)  demonstration  farms.  The  Department  of  Agriculture,  through 
its  various  bureaus,  conducts  all  kinds  of  investigations  and  experi- 
ments, employing  in  its  great  laboratories  a  large  body  of  experts. 
The  results  of  its  experiments,  together  with  the  results  of  the  work 
done  at  the  experiment  stations,  are  published  in  books  and  pamphlets 
and  sent  into  all  parts  of  the  country. 

The  state  agricultural  colleges  are  doing  work  similar  to  that 
done  by  the  bureaus  of  the  Department  of  Agriculture.  They  conduct 
experiments  in  their  laboratories  and  on  their  farms  and  publish  the 
results  for  dissemination  among  the  farmers.  In  addition  to  this 
work  is  that  of  instructing  young  men  and  women  in  the  principles  of 
agriculture,  horticulture,  dairying,  and  all  branches  of  farming.  The 
colleges  also  hold  farmers'  institutes  where  short  practical  courses 
are  given  to  farmers,  old  and  young.  Lecturers  are  also  sent  out,  and 
demonstration  trains  tour  the  country  to  .get  farmers  interested  in 
new  ideas. 

There  are  now  about  60  experiment  stations  established  by  the 
national  government,  there  being  at  least  one  in  each  state.  These 
ure  large  practical  laboratories  where  theories  worked  out  in  the  agri- 
cultural colleges  and  by  the  bureaus  of  the  National  Department  of 
Agriculture  are  put  to  the  test  in  the  actual  cultivation  of  crops. 
Both  the  colleges  and  the  government  bureaus  experiment  with  grow- 
ing plants;  but  the  experiment  stations  are  not  so  much  concerned 
in  discovering  new  principles  as  in  testing  these  principles  to  find  out 


ELEMENTS  OF  ECONOMICS  97 

whether  or  not  they  are  of  any  practical  value.  For  conducting  this 
work  Congress  appropriates  $30,000  yearly  to  each  experiment 
station. 

The  numerous  demonstration  farms,  as  the  nam-e  implies,  are 
for  the  purpose  of  carrying  to  the  farmers  in  a  practical,  convincing 
way,  the  general  knowledge  gained  from  all  the  various  sources. 
These  farms  are  conducted  on  a  paying,  business  basis.  The  value 
of  the  new  ideas  is  shown  in  better  crops  and  larger  profits  than 
the  ordinary  farm  can  show.  Nothing  convinces  like  seeing  a  thing 
tried.  And  each  farm  serves  as  an  object  lesson  to  the  farmers 
around. 

58.  LINES  OF  INVESTIGATION.  Experiments  and  investiga- 
tions are  condutced  along  various  lines,  six  of  which  are  of  special 
importance,  (1)  soil  analysis,  (2)  defects  of  soils,  (3)  plant  adapta- 
tion, (4)  dry  farming,  (5)  plant  development,  and  (6)  diseases  of 
plants. 

Soil  analysis  is  the  basic  study  which  naturally  leads  to  the 
other  lines  of  investigation,  especially  defects  of  the  soil,  plant  adapta- 
tion, and  dry  farming.  Soils  vary  greatly  in  character.  Some  are 
sandy,  some  are  clay  and  some  are  black  loam.  Most  soils  contain 
all  three  of  these  elements,  but  the  predominant  element  gives  the 
name  to  the  soil.  Other  elements  are  needed,  such  as  potash, 
nitrogen,  phosphates  and  other  minerals.  Different  soils  are  studied 
and  classified. 

Sot!  analysis  not  only  shows  the  elements  of  healthful,  normal 
soils,  but  it  discovers  defects  in  soils.  One  of  the  most  important 
defects  of  soils  is  the  lack  of  one  or  more  elements  essential  to  plant 
growth.  The  chief  cause  of  the  absence  of  these  elements  is  that 
the  same  kind  of  crop  has  been  grown  year  after  year  and  nothing 
put  back  into  the  soil.  Such  soil  is  said  to  be  "worn-out"  and  is  not 
to  be  confused  with  poor  soil.  Worn-out  soil  may  be  rich  in  all  but 
a  very  few  elements,  while  poor  soil  is  lacking  in  most  of  the  elements 
essential  to   plant  growth,   and  .consequently  worn-out   soil   is   more 


98  ELEMENTS  OF  ECONOMICS 

easily  made  fertile  than  poor  soil  is.  One  of  the  most  important  ele- 
ments taken  from  the  soil  by  growing  plants  is  nitrogen.  During 
the  days  of  the  Roman  Empire  it  was  discovered  that  by  growing 
leguminous  plants,  such  as  beans,  peas  and  clover,  worn-out  soil  would 
be  recuperated.  This  discovery  led  to  the  practice  of  rotation  of  crops, 
that  is,  planting  alternately  leguminous  crops  and  other  crops.  But 
the  causes  of  the  recuperation  of  the  soil  by  such  rotation  remained 
a  secret  until  modern  science  revealed  the  fact  that  certain  forms  of 
bacteria  gather  around  the  roots  of  leguminous  plants  and  draw 
into  the  soil  nitrogen  from  the  air.  Scientists  have  learned  how  to 
grow  these  bacteria,  and  by  spreading  them  over  the  field  the  soil 
is  "inoculated"  with  the  nitrogen  forming  bacteria,  thus  assisting 
nature  in  her  efforts  to  restore  the  soil  to  its  natural  fertility.  It  has 
been  shown  that  land  lacking  in  nitrogen  chiefly  can  be  restored  to 
fertility  at  a  nominal  cost  of  a  few  cents  an  acre  by  the  process 
of  "inoculation"  and  that  the  results  are  as  effective  as  when  com- 
mercial fertilizers  are  used  costing  $30.00  an  acre.  If  worn-out 
soils  lack  other  elements  besides  nitrogen,  other  fertilizers  must 
be  used. 

Soil  analysis  also  prepares  the  way  for  the  study  of  plant  adapta- 
tion. Different  kinds  of  soil  are  suited  to  different  kinds  of  crops. 
Some  crops  do  best  on  sandy  soil,  others  need  a  rich  black  loam, 
others  do  fairly  well  on  clay  lands  that  are  not  fit  for  other  kinds 
of  crops.  Again,  some  kinds  of  plants  do  well  on  wet  lands  and 
others  will  grow  well  on  dry  lands  not  fit  for  ordinary  crops.  Two 
notable  examples  of  plants  suited  to  dry  soils  are  alfalfa  and  durum 
wheat.  Alfalfa,  sending  its  roots  many  feet  into  the  soil,  is  fast 
becoming  an  exceedingly  valuable  crop  on  our  semi-arid  plains  of 
the  West  and  it  is  transforming  that  formerly  uninhabitable  region 
into  one  of  the  most  wealthy  farming  sections  of  the  whole  country. 

A  fourth  line  of  investigation  which  the  various  governmental 
agencies  are  conducting  is  plant  development.  Some  phases  of  plant 
development  are  quite  simple,  and  farmers  can  do  much  to  improve 


ELEMENTS  OF  ECONOMICS  99 

the  quality  and  quantity  of  crops.  By  using  proper  methods  of 
selecting  and  testing  seeds,  crops  may  be  increased  by  one-third  or 
more  at  practically  no  extra  cost.  Other  phases  of  plant  develop- 
ment require  the  scientific  knowledge  of  the  expert.  The  little  sour 
apple  has  been  developed  into  numerous  varieties  of  excellent  flavor, 
large  and  prolific.  Grapes  have  been  developed  from  the  little  sour 
fruit  of  the  forest;  and  most  wonderful  of  all  is  the  development 
of  the  cactus  plant.  Burbank,  the  wizard  of  the  plant  world,  has  taken 
the  prickly,  worthless  cactus  of  the  desert  and  developed  it  into  a 
spineless  fruit  with  little  apples  good  for  man  to  eat  and  with  a 
fibrous  part  that  makes  good  food  for  cattle  and  horses.  Some 
day  our  barren  deserts  may  blossom  with  this  new  wonder,  and 
happy  millions  may  dwell  in  the  now  desolate  regions. 

Closely  related  to  plant  development,  plant  adaptation,  and  rem- 
edying the  defects  of  the  soil,  is  "dry  farming."  Some  plants,  like 
the  cactus,  alfalfa,  and  durum  wheat,  have  by  development  been 
adapted  to  our  dry  soils.  Dry  farming  also  includes  methods  of 
cultivation  suitable  to  a  semi-arid  region.  Lack  of  moisture  is  also 
one  of  the  defects  of  soils;  hence  this  subject  is  related  in  several  ways 
to  the  other  lines  of  investigation.  Dry  farming  is  also  a  special 
phase  of  the  wider  subject  of  scientific  cultivation.  Each  kind  of 
soil  must  be  handled  differently.  Where  there  is  plenty  of  moisture 
farmers  can  learn  fairly  well  by  experience  how  to  handle  different 
kinds  of  soils;  but  where  there  is  not  enough  moisture  to  grow  crops 
by  the  ordinary  methods  of  cultivation  known  to  farmers  there  is 
special  need  of  government  aid  in  working  out  proper  methods  of 
cultivation,  for  farmers  cannot  make  their  living  while  learning  by 
experience.  The  vast  region  lying  between  the  99th  meridian  and 
the  Rocky  Mountains  is  semi-arid  and  most  of  it  cannot  be  irrigated, 
and  if  it  is  reclaimed  it  must  be  done  by  dry  farming.  The  land  is 
naturally  very  fertile  and  if  crops  could  be  grown  proportionate 
to  the  richness  of  the  land  it  would  support  a  dense  population.  Some 
portions  of  the  country  west  of  the  Rocky  Mountains  are  also  suited 


100  ELEMENTS  OF  ECONOMICS 

to  dry  farming.     Dry  farming  is  therefore  one  of  the  most  important 
agricultural  problems  in  the  United  States. 

The  national  government  and  the  various  state  governments  of 
the  West  are  studying  methods  of  farming  suited  to  the  semi-arid 
regions  and  a  few  principles  have  been  established,  though  as  yet 
no  complete  science  of  dry  farming  has  been  worked  out.  Among 
the  principles  thus  far  discovered,  three  are  interesting  and  important. 
(1)  The  seed  bed  must  be  fine  and  mellow,  but  fairly  compact,  to  se- 
cure proper  germination  of  the  seed;  (2)  the  soil  must  be  in  a  recep- 
tive condition,  so  that  what  little  rain  does  fall  will  not  run  off;  and 
(3)  the  soil  must  be  in  a  retentive  condition,  so  that  the  moisture  will 
not  quickly  evaporate.  Beyond  these  few  principles  nothing  is  yet 
established  and  no  universal  rule  can  be  laid  down  applicable  to  all 
kJnds  of  dry  soils.  It  was  once  thought  that  all  dry  lands  should 
be  plowed  deep  and  cultivated  shallow  so  as  to  create  a  dust  mulch. 
But  it  has  been  proved  that  these  are  not  universal  rules.  A  fine 
dust  mulch,  for  example,  is  not  always  best  since  a  light  rain  may 
cause  it  to  "puddle''  and  not  allow  the  water  to  sink  down  into  the 
ground. 

A  sixth  line  of  investigation  is  to. discover  the  causes  of  diseases 
of  plants.  This  is  a  vast  subject,  as  it  is  coextensive  with  agricul- 
ture. "Parasitic  insects  of  many  kinds  kill  forest  trees,  fruit  trees, 
and  many  other  plants;  various  kinds  of  weevil  destroy  grain,  fruit, 
cotton,  and  other  plants;  the  Hessian  fly  destroys  the  wheat;  grass- 
hoppers sometimes  become  so  numerous  that  they  eat  up  all  vegeta- 
tion over  wide  areas.  Some  progress  has  been  made  in  discovering 
means  of  destroying  these  and  numerous  other  pests  that  annually 
destroy  millions  of  dollars'  worth  of  grain,  fruit  and  other  crops. 
Much,  however,  remains  to  be  done  in  this  great  field. 

59.  CHILD  LABOR.  It  is  not  harmful  but  beneficial  for  chil- 
dren to  labor,  if  the  work  is  healthful,  not  too  severe,  and  does  not 
interfere  with  their  main  business  of  getting  an  education,  for  such 
labor   develops  the  child  physically,   gives   him   a,  right   attitude   to- 


ELEMENTS  O^F  ECf(>NOiV!?C/S  101 

wards  labor  and  trains  him  in  habits  of  industry.  The  child  labor 
problem  is  concerned  with  conditions  that  are  harmful.  Probably 
over  a  million  children  in  the  United  States,  under  15  years  of  age, 
are  working  under  conditions  that  are  very  injurious.  In  mines, 
factories,  canneries,  and  other  establishments  children  are  being 
stunted,  mentally,  physically,  morally.  In  order  to  develop  properly, 
children  must  have  proper  play  and  exercise,  but  hard,  monotonous 
work  prevents  normal  development.  Long  hours,  unhealthful  condi- 
tions, and  evil  companions  work  a  greater  harm  to  children  than 
to  adults.  Lack  of  education  is  an  attendant  evil.  Recent  investi- 
gations by  the  National  Child  Labor  Committee  show  that  44  per 
cent  of  the  white  children  in  the  mill  districts  of  Georgia  are  illit- 
erate. The  worst  evil  of  child  labor  is  probably  the  destruction  of 
all  ambition.  Ruined  in  mind  and  body,  robbed  of  the  birth  right 
of  every  American  child,  an  education  to  fit  him  for  the  battle  of 
life,  ambition,  the  mainspring  of  human  energy,  destroyed,  thousands 
of  children  are  yearly  turned  out  of  our  factories  to  become  a  prey 
upon  society,  for  at  the  age  of  maturity  they  are  unfit  for  any  occu- 
pation and  they  become  tramps,  robbers  or  invalids. 

The  country  is  beginning  to  realize  the  seriousness  of  the  situa- 
tion and  states  are  passing  laws  to  restrict  child  labor  and  prevent 
evil  conditions.  These  laws  limit  the  age  at  which  children  may  be 
employed  in  certain  industries,  limit  the  hours  of  labor,  and  pre- 
scribe certain  regulations  protecting  the  life  and  health  of  the  chil- 
dren. In  many  states  the  age  limit  is  14,  which  is  entirely  too  low, 
for  children  of  that  age  are  too  young  to  stand  the  strain  of  modern 
industry,  nor  have  they  sufficient  education  to  prepare  them  for  life's 
work.  Many  states  have  fairly  good  laws,  but  owing  to  defective 
machinery  of  government,  the  dishonesty  of  parents,  and  the  trickery 
of  employers,  these  laws  are  not  well  enforced.  A  public  registry 
of  births  would  prevent  the  parents  from  understating  the  ages  of 
their  children.  But  the  defective  machinery  of  government  is  not 
so  easily  remedied.     The  factory  inspector  is  too  often  the  appointee 


102  ,  ELEMENTS  OF  ECONOMICS 

of  the  employers,  since  the  employers  have  such  a  powerful  influ- 
ence in  the  government.  If  the  school  authorities  had  charge  of 
the  enforcement  of  factory  laws  in  so  far  as  they  are  applied  to 
children  of  school  age,  such  laws  would  be  better  enforced,  for  school 
authorities  are  not  usually  subject  to  political  control  and  they  are 
anxious  to  keep  the  children  in  school  as  long  as  they  can. 

In  addition  to  such  laws,  properly  enforced,  remedies  are  needed 
which  remove  the  causes  of  child  labor.  The  wages  of  the  father 
should  be  sufficient  to  enable  him  to  support  his  children,  and  widowed 
mothers  without  proper  means  of  supporting  their  children  should 
receive  pensions,  as  they  do  in  some  states.  Our  educational  system 
should  be  adjusted  to  the  needs  of  the  times  so  that  both  parents 
and  children  will  feel  that  the  school  will  help  them  in  the  practical 
work  of  getting  a  living;  and  finally  all  states  should  have  laws 
requiring  children  to  attend  school  until  they  have  reached  a  cer- 
tain age. 

The  subject  is  a  difficult  one  for  the  states  to  deal  with  and 
is  properly  a  national  problem.  The  standards  of  the  states  are  very 
different  and  the  state  with  the  lowest  standard  has  an  advantage 
over  the  other  states.  Where  the  age  limit  is  low  and  employers 
can  get  children  at  low  wages,  there  certain  kinds  of  industries  will 
gather,  deserting  states  with  higher  standards.  And  sometimes  when 
a  state  is  trying  to  protect  its  children  by  a  good  system  of  laws, 
the  children  are  taken  to  other  states  and  exploited  a  portion  of  each 
year.  For  example,  hundreds  of  workers  between  the  ages  of  6 
and  7  are  taken  from  northern  cities  to  work  in  canneries  in  cer- 
tain southern  states  during  the  winter  season,  when  by  the  laws 
of  their  home  states  the  children  should  be  in  school.  Congress,  hav- 
ing control  of  interstate  commerce,  could  help  secure  uniformity  in 
child  labor  laws  among  the  states,  or  at  least  correct  the  evils  of  the 
lack  of  uniformity,  by  passing  a  national  child  labor  law  and  exclud- 
ing from  interstate  commerce  all  goods  produced  under  conditions 
contrary  to  that  law.     Bills  of  this  character  have  at  various  times 


ELEMENTS  OF  ECONOMICS  103 

been  introduced  into  Congress  but  as  yet  have  failed  to  pass. 

60.  INDUSTRIAL  EDUCATION.  A  problem  of  vital  importance 
that  has  quite  recently  begun  to  receive  attention  is  industrial  edu- 
cation. Modern  industry  demands  that  a  certain  proportion  of  its 
workers  have  special  training.  In  modern  universities  and  profes- 
sional schools  society  trains  men  for  the  professions.  Commercial 
and  business  courses  in  high  schools  and  private  business  "colleges" 
are  preparing  boys  and  girls  for  office  work.  Until  recently,  how- 
ever, the  great  mass  of  industrial  workers  who  must  receive  training 
have  obtained  it  under  the  apprenticeship  system.  But  many  trades 
are  more  readily  learned  in  a  technical  or  trade  school  than  under  the 
apprenticeship  system,  because  they  learn  the  science  underlying  the 
practice  and  rules  of  the  trade.  It  has  been  demonstrated  that  in 
trades  that  must  be  learned  largely  by  the  apprenticeship  system  there 
is  a  gain  in  efficiency  by  previous  study  of  the  general  principles  of 
the  trade  in  school. 

The  United  States  has  fallen  behind  the  great  nations  of  Europe 
in  facilities  offered  for  vocational  training.  Our  numerous  pri- 
vate business  schools  and  business  courses  in  high  schools  prepare  for 
office  work  and  our  universities  give  courses  in  science  that  prepare 
for  the  professions.  But  we  have  neglected  the  masses  of  the  peo- 
ple. A  national  Commission  on  Vocational  Education  appointed  by  act 
of  Congress  to  investigate  the  needs  of  vocational  education  in  the 
United  States  reported  in  1914  that  of  more  than  25,000,000  workers 
in  agriculture  and  industry,  less  than  one  per  cent  have  had  adequate 
training.  Our  rich  natural  resources  have  enabled  us  to  hold  our 
own  in  competition  with  other  countries.  But  our  business  men  have 
been  greatly  hindered  by  the  scarcity  of  skilled  workers  and  they  have 
to  some  extent  train  their  own  employes  by  establishing  schools  for 
them  in  the  factory,  shop  or  store.  European  countries,  feeling  the 
need  of  training  their  workers  to  enable  their  business  men  to  com- 
pete with  America,  with  its  richer  natural  resources,  have  established 
vocational  schools  for  the  common  people,  and  now  American  indus- 


104  ELEMENTS  OF  ECONOMICS 

try,  to  hold  its  own,  is  importing  skilled  labor  from  Europe. 

Several  states  are  taking  steps  to  supply  the  growing  need  of 
vocational  education  in  this  country  and  technical  and  vocational  high 
schools  are  being  established.  For  six  years  efforts  have  been  made 
by  a  few  interested  in  the  subject  to  get  a  bill  through  Congress 
giving  aid  to  the  states  in  establishing  vocational  schools.  The  bill 
failed  to  pass  the  62nd  Congress,  but  a  commission  was  appointed  to 
investigate  the  subject. 

Theoretically,  there  is  no  question  as  to  the  wisdom  of  establish- 
ing vocational  schools  for  the  masses,  providing  the  cultural  and 
social  phases  of  education  are  not  neglected.  But  the  problem  pre- 
sents great  practical  difficulties.  One  of  the  chief  problems  is,  Shall 
trade  schools  be  established  which  actually  prepare  pupils  for  taking 
up  a  trade  without  apprenticeship,  or  shall  the  foundations  of  several 
allied  trades  be  learned  so  that  the  boy  can  more  intelligently  choose 
his  vocation  when  he  gets  through  school  and  can  learn  it  with  a 
short  apprenticeship?  If  we  attempt  to  teach  the  trades  fully  in 
school,  two  difficulties  at  least  are  encountered.  One  difficulty  would 
be  to  provide  at  a  reasonable  expense  instruction  and  practice  in  all 
the  trades.  There  are  hundreds  of  trades  in  modern  industry,  and 
in  each  community  there  are  usually  a  large  number.  In  small  cities 
instruction  would  be  offered  in  only  a  few  of  the  main  trades  of  the 
locality,  which  would  result  in  an  oversupply  of  skilled  labor  in  some 
trades  and  a  scarcity  in  others,  with  the  consequent  waste  of  social 
energy.  In  the  second  place,  there  is  danger  of  increasing  the  num- 
ber of  misfits  in  life  if  boys  choose  their  occi:^pation  too  young.  If 
they  have  an  opportunity  to  learn  the  elements  of  several  trades  in 
school  they  choose  their  vocation  more  wisely  after  they  have  finished 
this  prevocational  education.  Other  practical  difficulties  present 
themselves,  but  enough  have  been  given  to  show  that  the  problem 
should  be  studied  with  care  before  establishing  any  elaborate  system 
of  vocational   schools. 


:  ELEMENTS  OF  ECONOMICS  105 

CHAPTER  VII. 
Monopolies. 

61.  DEFINITION  OF  MONOPOLY.  In  the  strict  meaning  of 
the  term,  a  monopoly  is  a  company  that  controls  the  whole  supply 
of  a  commodity.  Absolute  monopolies,  however,  are  rare,  and  for  all 
practical  purposes  a  monopoly  may  be  considered  as  any  company 
that  controls  enough  of  a  commodity  to  enable  it  to  control  the  price. 
The  proportion  of  the  supply  that  a  company  must  control  in  order  to 
raise  prices  above  the  competitive  level  depends  upon  the  nature  of 
the  commodity.  In  .case  of  a  necessity,  for  which  no  substitute  can 
be  found,  only  a  small  percentage  of  the  supply  need  be  controlled, 
while  in  case  of  a  luxury  or  where  a  substitute  can  be  found,  a  large 
percentage  of  the  supply  must  be  controlled  in  order  to  raise  prices 
above  the  competitive  level. 

62.  CLASSES  OF  MONOPOLIES.  Monopolies  may  be  classi- 
fied as  natural,  legal  and  artificial.  There  are  different  ways  of 
classifying  monopolies,  but  this  lolassification  is  helpful,  as  it  is  based 
upon  the  fundamental  causes  of  monopoly.  Natural  monopolies  are 
of  two  kinds,  those  that  own  the  source  of  supply  of  the  commodity 
controlled  and  those  that  are  able  to  drive  out  competitors  by  the 
advantages  of  large-scale  production.  An  exami)le  of  the  former 
is  the  anthracite  coal  monopoly,  a  vast  combination  of  companies  con- 
trolling practically  all  the  hard  coal  in  the  country.  Examples  of 
the  latter  kind  of  monopolies  are,  (1)  municipal  monopolies,  such  as 
street  railways,  gas  and  electric  lighting  -companies,  (2)  telephone 
and  telegraph  companies,  and  (3)  railroads.  These  are  monopolies 
because  the  unit  of  maximum  efficiency  is  so  large  that  the  whole 
market  is  supplied  more  cheaply  by  one  company  than  by  two  or  more. 

Legal  monopolies  owe  their  power  to  a  patent,  a  copyright, 
or  a  monopoly  charter.  A  business  owned  and  conducted  by  the  gov- 
ernment is  also  a  legal  monopoly,  such  as  the  postoffice.  Natural 
monopolies,  such  as  railroads  and  street  railways,  frequently  possess 


106  ELEMENTS  OF  ECONOMICS 

certain  patent  rights  that  help  them  maintain  their  monopoly;  also 
.  the  ownership  of  especially  advantageous  terminal  facilities  may 
help  a  railroad  in  its  fight  with  rivals. 

Artificial  monopolies  are  those  that  maintain  their  monopoly 
power  by  means  of  some  unfair  advantage  over  rivals.  It  may  be 
a  high  tariff  rate  which  shuts  out  competition  from  foreign  coun- 
tries and  enables  home  producers  to  combine  and  raise  prices  above 
the  competitive  level.  A  special  favor  from  a  railroad  in  the  form 
of  low  rates  may  enable  the  favored  company  to  undersell  rivals  and 
drive  them  out  of  business,  and  then  prices  are  raised  above  the 
normal  rates.  If  any  rival  threatens  to  come  into  the  field  it  can 
easily  be  driven  out  because  prices  may  be  temporarily  put  so  low 
that  the  new  comer  cannot  make  any  profits  and  still  the  favored 
company  can  make  a  fair  return  on  its  capital.  Again,  if  a  company 
is  very  large  it  may  use  "unfair"  means  to  keep  competitors  out. 
Among  the  "unfair"  means  is  that  of  temporarily  lowering  prices 
until  the  rival  is  ruined.  A  large  company  may  have  many  estab- 
lishments in  different  parts  of  the  country  and  it  could  afford  to 
run  one  establishment  at  a  loss  in  order  to  drive  out  a  small  rival. 
Just  what  kinds  of  business  come  under  the  head  of  artificial  mon- 
opolies is  not  an  easy  matter  to  decide.  No  monopoly  may  be 
wholly  artificial,  for  all  may  have  some  element  of  legal  or  of 
natural  monopoly.  The  most  important  practical  problem  before 
the  country  at  the  present  time  regarding  monopolies  is  whether 
or  not  the  great  manufacturing  monopolies  are  natural  or  artificial 
or  a  combination  of  the  two. 

63.  FORMS  OF  COMBINATION.  In  the  growth  of  monopolies, 
both  natural  and  artificial,  various  forms  of  combination  arose.  The 
most  complete  union  of  competing  companies  is  actual  consolida- 
tion into  one  company.  But  as  a  rule,  at  least  when  combining  com- 
panies were  large,  each  constituent  company  has  maintained  its  own 
identity,  having  its  own  officers,  and  to  a  certain  extent  pursuing 
its   own   policy.     The   more  important  forms   of  this  class  of  com- 


ELEMENTS  OF  ECONOMICS  lOT 

binations  are  the  friendly  agreement,  the  pool,  the  trust,  the  hold- 
ing company,  the  community  of  interest,  and  interlocking  director- 
ates. There  have  been  two  periods  in  the  growth  of  combinations  re- 
sulting in  complete  consolidation.  The  first  was  the  consolidation  of 
small  concerns  into  large  ones,  seemingly  to  secure  the  advantages 
of  large-scale  production.  Usually  these  consolidations  did  not  result 
in  monopoly.  This  was  the  first  step  in  the  fierce  competition  among 
manufacturing  firms  in  the  '80's  that  resulted  in  the  pool,  the  trust, 
and  other  forms  of  combination.  'The  second  period  in  the  growth 
of  consolidation  is,  according  to  Professor  Taussig,  the  last  stage 
in  the  development  of  monopoly,  during  which  the  more  loosely 
organized  monopoly  becomes  a  giant  corporation.  Attempts  of  law- 
makers to  prevent  the  looser  forms  of  organization  have  sometimes 
driven  the  companies  into  this  form  of  organization;  and  it  is  yet 
an  open  question  whether  or  not  such  a  combination  can  be  attacked 
through  the  courts,  since  there  may  be  no  rivals,  hence  it  cannot 
be  shown  that  competition  is  stifled. 

The  loosest  form  of  combination  is  the  agreement  to  main- 
tain rates  or  prices  or  to  act  in  harmony  in  other  ways.  This 
form  of  combination  also  has  had  two  periods  of  development.  Dur- 
ing the  first  period  there  were  many  competitors  and  it  was  hard 
to  compel  them  to  keep  their  agreement,  since  their  contracts  were 
illegal  and  each  gained  an  advantage  by  breaking  his  contract,  pro- 
viding others  kept  theirs.  The  second  period  of  growth  resulted 
from  attempts  to  break  up  the  more  tangible  forms  of  combination,^ 
and  today  many  of  the  greatest  monopolies  are  apparently  of  this 
form.  It  has  become  easier  for  the  few  great  companies  that  re- 
main after  the  smaller  ones  have  been  crushed  to  keep  their  agree- 
ments than  it  was  for  many  companies  to  keep  them,  and  moreover, 
they  have  learned  by  experience  that  it  is  best  for  all  in  the  long 
run  to  keep  their  agreements. 

The  pool  is  much  like  the  fri-endly  agreement,  the  only  distin- 
guishable difference  being  the  existence  of  an  informal  joint  com- 


108  ELEMENTS  OF  ECONOMICS 

mittee  to  see  that  agreements  ^re  maintained.  Each  company  main- 
tains complete  control  over  its  own  affairs,  fixing  prices,  hiring  its 
own  help,  appointing  its  own  officers,  and  possessing  the  legal  power 
to  ignore  agreements  with  other  companies  that  create  monopoly. 
The  essence  of  these  agreements  were  either  to  divide  the  territory, 
to  divide  a  certain  percentage  of  the  profits,  or  to  limit  the  output 
and  maintain  certain  prices.  In  any  of  these  agreements  monopoly 
is  secured. 

Pools  were  made  illegal  either  by  court  decisions  or  by  law,  both 
state  and  national,  and  the  trust  sprang  up.  The  trust  is  a  c6m- 
bination  formed  by  each  competing  company  placing  the  majority 
of  its  stock  in  the  hands  of  a  common  board  of  trustees  who  issue 
to  the  stockholders  certificates  of  stock  held  by  the  board.  Each 
company  maintains  its  own  organization  but  the  board  of  trustees 
holds  the  majority  of  the  stock  of  each  company  and  can  thus  con- 
trol the  policy  of  each;  hence  )Competition  is  absolutely  suppressed. 
There  is  in  reality  but  one  company,  though  in  form  there  are  several. 

The  trust  was  declared  illegal  both  by  state  and  national  law, 
the  Sherman  Anti-trust  Act  of  1890  expressing  the  will  of  the 
nation  that  monopoly  in  any  form  should  not  exist.  Straightway 
the  captains  of  industry  got  their  heads  together  and  the  holding 
company  sprang  into  being.  In  this  form  of  combination  a  charter 
is  obtained  from  some  state  allowing  the  new  company  to  pur- 
chase and  hold  stack  of  other  companies.  On  the  surface  there  is 
no  voluntary  agreement  on  the  part  of  the  combining  companies 
to  enter  into  a  combination,  as  there  was  in  the  case  of  the  trust. 
The  monopoly  appeared  to  be  the  accidental  result  of  an  outside  party 
buying  up  the  majority  of  the  stock  of  companies  that  happened 
to  be  in  the  same  line  of  business.  And  to  buy  property  seemed  to 
be  the  natural  right  of  every  one.  In  reality  there  is  no  essential 
difference  between  the  trust  and  the  holding  company,  the  new 
corporation  performing  the  same  functions  that  the  board  of  trustees 
performed,  and  in  both  cases  the  leading  men  controlling  the  com- 


ELEMENTS  OF  ECONOMICS  10^ 


bination  were  not  an  outside  concern,  but  the  leading  men  in  the 
combining  companies.  It  seemed  for  a  time  that  the  holding  com- 
pany would  not  be  open  to  attack  through  the  courts,  but  after 
some  hesitation  the  courts  brushed  aside  legal  subtilities  and  de- 
clared a  holding  company  contrary  to  law  if  it  actually  created  a 
monopoly. 

A  newer  and  more  subtle  form  of  combination  is  secured  by  in- 
terlocking directorates.  There  is  no  combination  in  form,  and  no 
company  or  body  of  persons  that  represents  any  formal  combination. 
Real  unity,  however,  is  secured  by  the  men  on  the  boards  of  directors 
of  the  different  companies  being  practically  the  same  group.  Hence, 
while  there  is  no  record  of  union  or  of  united  action,  this  group  of 
men  would  not  pursue  a  policy  for  one  company  inconsistent  with 
their  policies  for  all  the  others.  The  union  is  just  as  real  through 
this  latter  form  as  through  any  other  and  is  just  as  effective.  Con- 
gress has  recently  declared  this  form  also  illegal,  and  what  the  cap- 
tains of  industry  will  do  next  remains  to  be  seen. 

The  most  subtle  and  the  most  dangerous  form  of  combination 
is  the  "community  of  interest"  in  which  a  group  of  men  own  the 
controlling  interest  in  several  concerns  that  are  supposed  to  h& 
rivals.  This  group  of  men,  instead  of  appointing  themselves  direc- 
tors of  the  different  companies,  thus  forming  interlocking  director- 
ates, appoint  different  men  on  the  different  boards  of  directors  who 
carry  out  their  orders.  These  "dummy"  directors  of  the  supposed 
rival  firms  will  act  in  harmony  simply  because  they  execute  the 
orders  of  the  small  knot  of  m-en  who  are  their  common  masters. 
The  federal  courts  have  definitely  sanctioned  this  form  of  combina- 
tion, on  the  ground,  apparently,  that  all  individuals  have  a  right  to 
own  stock  in  as  many  companies  as  they  wish  and  to  vote  for  whom 
they  wish  for  directors  of  the  different  companies.  In  a  later  case, 
however,  the  Supreme  Court  of  the  United  States  held  that  inter- 
corporate relationship  through  individual  stockholders  was  contrary 
to  the  Sherman  Act.     In  1913,  in  its  decree  dissolving  the  union  be- 


110  ELEMENTS  OF  ECONOMICS 

tween  the  Union  Pacific  and  the  Southern  Pacific  railroads  the  Su- 
preme Court  laid  down  this  principle  and  the  U.  S.  District  Court 
in  carrying  out  the  decree  of  the  court  above  enforced  this  principle 
to  the  extent  of  denying  individual  stockholders  the  right  to  vote  in 
both  companies  if  they  held  stock  in  both.  There  seems  to  be  no 
reason  why  this  principle  should  not  hold  in  the  case  of  manufactur- 
ing corporations  as  well  as  of  railroads.  If  the  courts  adopt  this 
jiew  principle  and  apply  it  to  all  corporations  it  will  again  illustrate 
the  recent  tendency  of  the  courts  to  prevent  monopolists  from  evad- 
ing the  spirit  of  the  law  while  seemingly  complying  with  the  letter 
of  the  law. 

64.  MUNICIPAL  MONOPOLIES.  Public  service  corporations, 
such  as  street  railways,  gas  and  electric  lighting  companies,  and 
telephone  companies,  are  natural  monopolies.  Two  or  more  com- 
panies in  any  of  the&e  lines  of  business  would  require  an  unnecessary 
duplication  of  the  distributing  plant  and  could  not  be  run  as  cheaply 
as  one  company.  The  law  of  large-scale  production  applies  in  each 
case  and  the  saving  is  due  to  economy  in  the  use  of  fixed  capital, 
salaries  of  head  officials,  and  various  other  items.  Being  natural 
monopolies,  the  welfare  of  the  public  is  endangered,  if  the  companies 
are  not  under  effective  public  control.  High  rates  and  poor  service 
result  in  unduly  large  profits;  street  cars  are  over  crowded;  the  city 
water  is  often  dangerous  to  the  health  of  the  people;  gas  is  poor  in 
quality  and  of  low  pressure. 

From  the  nature  of  the  case,  therefore,  municipal  monopolies 
must  either  be  owned  by  the  city  or  under  public  control.  Either 
policy  has  its  weaknesses.  If  the  city  government  attempts  to  con- 
trol these  corporations  and  keep  their  profits  at  a  reasonable  rate, 
the  corporations  naturally  attempt  to  evade  control  by  influencing 
either  the  legislative  or  the  executive  departments  of  the  municipal 
government,  and  if  unsuccessful  in  controlling  these  departments, 
the  corporations  sometimes  obtain  relief  from  the  courts  whose  judges 
are  unduly  influenced.     Some  investigators  assert  that  the  municipal 


ELEMENTS  OF  ECONOMICS  111 

corporations  have  been  the  most  powerful  cause  of  the  corruption  in 
our  city  governments. 

On  the  other  hand,  municipal  ownership  has  its  dangers.  Cor- 
ruption of  the  governm-ent  by  the  corporations  is  apt  to  be  ex- 
changed for  graft  and  dishonesty  among  city  officials.  There  are 
other  causes  of  dishonesty  in  city  governments  besides  the  influence 
of  public  service  corporations,  "boss"  rule  being  the  most  important. 
If  a  political  "boss"  rules  the  city,  the  addition  of  these  other  activi- 
ties to  the  ordinary  duties  of  the  city  would  multiply  the  opportun- 
ities for  graft  and  corruption.  In  that  case  the  management  of  these 
affairs  would  be  inefficient  and  the  people  would  get  no  better  ser- 
vice and  probably  the  taxpayers  would  have  to  help  pay  expenses. 
The  vital  point  in  the  whole  controversy  is  whether  or  not  the  city 
government  is  honest  and  efficient.  In  European  countries,  where 
city  governments  are  more  honest  and  efficient  than  those  in  Amer- 
ica, municipal  ownership  seems  to  have  been  a  success.  But  until 
American  municipal  governments  can  make  a  much  better  showing, 
both  of  efficiency  and  of  honesty,  than  they  have  in  the  past,  munici- 
pal ownership  does  not  offer  a  very  encouraging  solution  of  the 
problem  of  municipal  monopolies. 

Owing  to  this  condition  of  affairs  and  the  natural  individualistic 
tendencies  of  Americans,  our  statesmen  are  turning  to  another 
method  of  solving  this  problem,  namely,  state  control.  Within  the 
past  three  or  four  years  twenty  states  have  enacted  laws  establish- 
ing a  state  commission  to  control  all  the  public  service  corporations 
within  the  state,  including  railroads,  telegraph  and  telephone  com- 
panies, interurban  transportation  lines,  and  all  municipal  monopo- 
lies. The  Illinois  law,  passed  in  1913,  may  be  taken  as  a  good  exam- 
ple of  this  new  experiment.  The  law  establishes  a  state  board  with 
power  to  control  all  public  service  corporations  within  the  state. 
Among  the  vast  powers  of  this  board  three  are  of  special  import- 
ance, (1)  the  regulation  of  rates,  (2)  establishing  a  uniform  system 
of  accounting,  and   (3)   regulating  the  issuing  of  stocks  and  bonds. 


112  ELEMENTS  OF  ECONOMICS 

Thus  three  of  the  most  vital  matters  in  any  business  is  placed  in  the 
hands  of  a  government  board,  and  a  long  step  is  taken  towards  social 
control  of  private  business.  It  remains  to  be  seen  whether  or  not  our 
state  governments  will  prove  more  -effective  in  their  control  of  these 
monopolies  than  municipal  governments  have  been.  This  increase 
in  the  duties  of  the  executive  department  of  our  state  governments 
may  result  in  strengthening  this  weak  branch  of  government. 

Some  critics  think  that  this  is  a  movement  in  the  wrong  direc- 
tion, since  it  centralizes  in  the  state  things  that  belong  exclusively 
to  each  city.  If  the  city  allows  itself  to  be  cheated  and  robbed  by 
these  public  service  corporations,  say  these  critics,  it  is  the  fault  of 
the  city,  and  the  best  way  to  get  good  city  government  is  to  let  the 
people  of  the  city  struggle  with  the  problem  until  it  is  solved.  But 
whether  this  movement  is  wise  or  unwise,  it  is  growing  rapidly. 

65.  MANUFACTURING  MONOPOLIES.  Economists  and 
statesmen  alike  agree  that  railroads,  telegraph  and  telephone  lines, 
and  municipal  public  service  corporations  are  natural  monopolies 
and  that  they  cannot  be  destroyed,  but  must  be  either  owned  or  con- 
trolled by  the  government.  It  is  agreed  also  that  if  the  policy  is  to 
be  public  control,  rates  and  prices  are  among  the  things  that  must 
be  regulated.  But  there  is  no  agreement,  either  among  economists 
or  statesmen,  as  to  the  nature  of  the  manufacturing,  or,  as  they  are 
often  called,  capitalistic  monopolies.  Some  believe  they  are  artificial 
and  ought  to  be  destroyed,  others  think  they  are  natural  and  cannot 
be  destroyed,  and  others  think  they  combine  elements  both  of  arti- 
ficial and  natural  monopolies,  and  that  the  public  policy  towards 
them  should  be  to  take  such  measures  as  will  destroy  the  artificial 
props  that  sustain  these  monopolies  and  then  subject  them  to  rigid 
regulation.  How  far  this  regulation  ought  to  go  is  a  question,  but  a 
few  of  our  leading  public  men  advocate  the  regulation  of  prices  of 
goods  made  by  monopolies,  while  others  hold  that  such  a  policy 
would  be  socialism.  None  but  the  socialists  advocate  public  owner- 
ship of  these  monopolies;  and  indeed  if  the  public  were  to  own  all 


ELEMENTS  OF  ECONOMICS  113 

the  natural  monopolies  and  all  the  manufacturing  monopolies  it 
would  very  nearly  constitute  socialism,  since  there  would  be  left  to 
private  enterprise  only  farming,  retail  mercantile  business,  and 
the  small  manufacturing  establishments.  But  it  may  not  follow  that  if 
manufacturing  monopolies  are  artificial  they  can  be  destroyed.  It 
may  be  possible  that  the  forms  of  combination  to  secure  monopoly 
are  so  subtle  and  so  secret  that  the  existence  of  monopoly  cannot  be 
proved  in  a  court  of  law.  If  such  should  prove  to  be  the  case,  regula- 
tion of  prices  may  become  necessary. 

It  is  clear  that  we  need  more  evidence  before  any  final  decision 
is  safe.  And  what  is  the  nature  of  the  evidence  required?  The 
main  points  around  which  controversy  centers  are  the  following: 
When  companies  combine  to  form  a  monopoly  do  they  permanently 
maintain  the  producing  plants  of  the  constituent  companies  or  do  they 
build  a  plant  large  enough  to  turn  out  the  total  supply?  If  the  lat- 
ter policy  is  followed  it  is  good  evidence  that  the  monopoly  owes  its 
power  to  the  advantages  of  large-scale  production  and  is  therefore 
natural.  If  the  former  policy  is  followed  it  proves  that  the  monop- 
oly is  not  due  to  large-scale  production,  using  the  term  production 
in  the  most  limited  sense,  meaning  merely  the  manufacturing  part 
of  the  process  and  not  including  the  marketing.  There  may  be  va- 
rious economies  in  marketing,  such  as  saving  the  cost  of  advertis- 
ing and  of  cross-shipments,  or  obtaining  lower  rates  by  shipping 
in  larger  quantities.  Where  several  rivals  exist  there  is  much  waste 
in  cross-shipments,  while  under  monopoly  control  goods  would  be 
sent  from  the  plant  nearest  the  consumer,  thus  saving  in  the  cost  of 
transportation.  If  monopolies  owe  their  existence  to  unfair  com- 
petition, the  tariff,  or  railway  rate  discrimination,  it  is  proof  that 
these  monopolies  are  artificial.  Another  point  in  controversey  is 
concerned  with  the  industrial  condition  that  produced  the  monopo- 
lies. Some  -contend  that  most  of  the  capitalistic  monopolies  were 
formed  in  times  of  industrial  depression  and  that  low  profits,  result- 
ing from   competition,  drove  rival   firms   into   combination   in   order 


114  ELEMENTS  OF  ECONOMICS 

to  secure  the  advantages  of  large-scale  production.  Others  contend 
that  most  combinations  were  formed  in  times  of  prosperity,  and 
conclude  from  this  that  the  monopolies  are  artificial.  But  this  point 
would  prove  nothing,  for,  whether  in  times  of  industrial  depression 
or  in  times  of  prosperity,  firms  might  combine  either  to  convert  losses 
due  to  unnatural  competition  into  the  high  profits  of  natural  mo- 
nopoly, or  to  convert  moderate  profits  into  higher  profits  from  ar- 
tificial monopoly.  Thus  it  appears  that  before  we  can  decide  whether 
the  manufacturing  monopolies  are  natural  or  artificial  there  must  be 
more  investigation  to  ascertain  the  facts  and  a  proper  interpretation 
of  the  significance  of  the  facts  discovered. 

66.  EVILS  OF  MONOPOLIES.  Before,  considiering  remedies 
for  monopolies  it  is  well  to  look  briefly  at  their  evils  in  order  to  ap- 
preciate more  fully  the  importance  of  the  problem.  The  chief  evil  is 
the  increase  in  prices.  In  the  absence  of  general  investigation  along 
this  line  it  is  impossible  to  give  any  general  estimate  as  to  how 
much  above  the  competitiye  rates  monopoly  prices  are.  But  occa- 
sional investigations  reveal  exorbitant  prices.  It  is  claimed,  for  ex- 
ample, that  the  cost  of  mining  anthracite  coal  is  about  two  dollars 
a  ton,  while  it  sells  for  six  dollars  a  ton  and  upward;  and  the  presi- 
dent of  one  of  the  coal  roads  asserted  that  if  competition  prevailed 
anthracite  coal  would  sell  at  two  dollars  a  ton.  In  some  industries 
prices  are  raised  and  at  the  same  time  the  quality  is  deteriorated. 
In  order  to  maintain  high  prices  it  is  necessary  to  diminish  the  out- 
put.    Thus  is  the  consumer  thrice  robbed. 

Another  grave  evil  of  monopoly  is  the  lowering  of  the  rates  of 
wages.  Where  any  industry  is  controlled  by  one  company  or  by  a 
few  companies  who  practically  work  in  unison,  the  individual  laborer 
is  at  a  disadvantage  in  bargaining  and  must  accept  whatever  wages 
are  offered  him.  The  easiest  way  for  monopolists  to  increase  profits 
is  to  reduce  wages,  and  unless  a  strong  labor  union  creates  monopoly 
of  labor  the  natural  result  of  monopoly  of  capital  is  to  reduce  wages. 
This  is  especially  true  in  case  of  skilled  or  semi-skilled  labor  which 


ELEMENTS  OF  ECONOMICS  115 

cannot  readily  move  from  one  industry  to  another  without  sinking 
to  the  ranks  of  unskilled  labor. 

Another  evil  is  the  crushing  out  of  rivals  and  the  consequent 
suffering  this  entails.  If  they  are  natural  monopolies,  this  would 
be  only  a  temporary  evil  during  the  stage  of  formation,  and  the  ulti- 
mate effects  would  be  beneficial,  if  the  monopolies  are  kept  under 
proper  control,  since  one  concern  can  produce  the  goods  cheaper  than 
several  firms.  But  if  they  are  artificial  monopolies  society  gains 
nothing  in  the  way  of  a  lowering  of  the  cost  of  production,  and  the 
result  is  an  unmixed  evil.  A  few  men  gather  into  their  hands  the 
best  fruits  of  modern  industry.  In  1912  the  Stanley  committee,  ap- 
pointed by  Congress  to  investigate  the  "trusts,"  submitted  a  report 
which  shows  that  23  men  were  in  control  of  corporations  represent- 
ing a  capital  of  $35,521,143,000,  which  is  nearly  one-fourth  of  the  to- 
tal wealth  of  the  United  States. 

67.  THE  SHERMAN  ANTI-TRUST  LAW  OF  1890.  In  the  de- 
cade from  1880  to  1890  the  movement  towards  monopoly  under  the 
form  of  the  trust  became  rapid,  and  many  states  passed  laws  to  for- 
bid the  formation  of  monopolies.  These  laws  had  little  effect,  be- 
cause the  trusts  either  reorganized  under  forms  that  evaded  these 
laws  or  obtained  charters  in  states  that  had  no  anti-trust  laws.  In 
1890  Congress  passed  the  Sherman  Anti-Trust  Law,  which  prohibits 
all  combinations  in  restraint  of  interstate  commerce.  For  a  number 
of  years  the  Supreme  Court  of  the  United  States  interpreted  the  law 
so  as  to  make  it  apply  only  to  the  transportation  and  sale  of  goods, 
and  not  to  the  process  of  manufacturing.  But  recent  decisions  have 
interpreted  the  law  so  as  to  include  manufacturing  establishments 
whose  products  enter  into  interstate  commerce. 

Many  important  decisions  have  been  rendered  within  the  last 
few  years  concerning  manufacturing  monopolies,  four  of  which  are 
especially  instructive.  In  the  Standard  Oil  case  of  1911  the  govern- 
ment had  no  difficulty  in  proving  that  the  holding  company  of  New 
Jersey  which  controlled  the  oil  interests  was  a  monopoly,  and  it  was 


116  ELEMENTS  OF  ECONOMICS 

dissolved  and  the  stock  handed  over  to  the  constituent  companies. 
But  the  price  of  oil  was  not  reduced,  and  the  common  opinion  is  that 
a  gentleman's  agreement  and  interlocking  directorates  prevent  com- 
petition now  as  effectively  as  ever.  The  Tobacco  Trust  case  had 
similar  results.  The  companies  were  reorganized,  but  prices  did  not 
fall  and  no  competition  seems  to  exist.  One  of  the  most  remarkable 
cases  was  the  suit  against  the  Beef  Trust.  The  government  spent 
nine  years  accumulating  evidence  of  monopoly,  but  the  evidence  did 
not  convince  the  jury  that  a  monopoly  existed.  In  this  case  there 
seems  to  have  been  a  gentleman's  agreement,  but  it  could  not  be 
proved.  Yet  all  who  know  anything  about  it  seem  to  believe  that  a 
monopoly  does  exist.  In  1913  came  the  Coal  Trust  case  in  which  the 
government  failed  to  prove  that  a  monopoly  existed,  though  the  com- 
mon  belief  has  been  that  for  years  a  vast  network  of  holding  com- 
panies  and  interlocking  directorates  had  held  in  its  grasp  practically 
all  the  coal  mines,  railroads,  and  several  other  industries  in  the  an- 
thracite region.  And  the  president  of  one  of  the  coal  roads  declared 
that  competition  among  the  coal  companies  did  not  exist. 

Stated  briefly,  the  results  of  these  four  cases  were  either  that 
the  government  could  not  prove  that  monopoly  existed  or  else  it 
compelled  the  companies  to  assume  other  forms  of  monopoly.  Thus 
for  over  a  quarter  of  a  century  both  the  state  and  the  national  gov- 
ernments have  attempted  to  destroy  monopoly  and,  as  Professor 
Taussig  says  in  his  Principles  of  Economics,  published  in  1912,  "To 
all  intents  and  purposes,  this  policy  of  repression  has  been  a  flat 
failure."  Monopoly  is  steadily  growing  in  spite  of  all  this  repression.. 
To  quote  from  the  same  eminent  authority,  "Far-reaching  plans  and 
ultimate  results  play  a  greater  and  greater  part  in  industry.  Still 
more  important  is  the  fact  that,  as  large-scale  production  spreads, 
the  number  of  individual  establishments  diminishes,  and  the  entrance 
of  new  competitors  grows  increasingly  difficult.  The  attempts  at 
combination  become  more  persistent  and  ingenius,  and  the  efficacy  of 
a  policy  of  non-interference  becomes  more  uncertain." 


ELEMENTS  OF  ECONOMICS  117 

68.  RECENT  ANTI-TRUST  LEGISLATION.  This  failure  of 
the  Sherman  Law  to  accomplish  its  purpose  led  Congress  in  1914  to 
enact  two  anti-trust  laws  known  as  the  Trade  Commission  Act  and 
the  Clayton  Act.  These  two  acts  merely  supplement  the  Sherman 
Act  and  seek  to  destroy  monopoly.  The  main  provisions  of  these 
acts  are  to  prevent  unfair  competition,  to  forbid  interlocking  direc- 
torates and  holding  companies  where  the  effect  is  to  create  a  mo- 
nopoly, and  to  create  a  commission  to  enforce  anti-trust  laws.  What 
would  be  included  under  unfair  competition  is  to  be  determined  by 
the  commission,  subject  to  review  by  the  regular  courts.  One  form 
of  unfair  competition,  however,  is  specially  mentioned,  namely,  dis- 
criminations in  priees  in  favor  of  purchasers  who  promise  not  to  deal 
with  rival  companies.  The  form  of  combination  known  as  the  com- 
munity of  interest  is  not  forbidden.  Congress  doubtless  agreeing  with 
the  courts  in  their  earlier  decisions  that  such  combinations  cannot 
legally  be  forbidden.  A  federal  commission  of  five  was  created  with 
general  power  of  enforcing  anti-trust  laws.  It  can  investigate  the 
financial  condition  and  the  management  of  corporations  engaged  in 
interstate  commerce,  inspect  their  books,  compel  the  companies  to 
make  reports  of  their  conditions,  and  publish  such  facts  as  it  sees 
fit,  except  trade  secrets.  The  purpose  of  making  public  the  general 
conditions  of  the  companies  investigated  is  to  invite  competition  in 
case  unusually  high  profits  are  revealed.  No  penalty  is  named  in 
these  acts  for  violation  of  the  provisions  prohibiting  interlocking 
directorates  and  holding  companies,  and  apparently  the  only  means 
of  enforcing  these  prohibitions  is  to  fine  or  imprison  offenders  for 
contempt  of  court.  Some  critics  doubt  the  effectiveness  of  such  a 
penalty  and  predict  that  our  jails  will  not  be  overcrowded  with  of- 
fenders against  the  anti-trust  laws. 

To  what  extent  does  this  new  legislation  supplement  or  amend 
previous  anti-trust  laws?  In  the  first  place,  no  new  policy  is 
adopted;  it  is  the  policy  of  repression  rather  than  regulation.     The 


118  ELEMENTS  OF  ECONOMICS 

three  factors  'relied  on  to  crush  monopolies  are  legislative  prohibi- 
tion, publicity  in  order  to  invite  competition,  and  the  removal  of 
certain  artificial  props  that  support  monopolies.  The  Sherman  Act 
of  1890  prohibited  all  combinations  in  restraint  of  interstate  com- 
merce, and  properly  interpreted  would  forbid  holding  companies  and 
interlocking  directorates.  The  federal  courts  in  several  decisions 
have  expressly  announced  the  principle  that  interlocking  directorates 
and  holding  companies  that  tend  to  create  monopolies  are  contrary 
to  the  Sherman  Act.  It  would  not  appear,  therefore,  that  anything 
has  been  added  to  the  Act  of  1890  in  this  direction.  A  real  addition 
has  been  made,  however,  in  an  effort  to  secure  publicity,  which  may 
invite  competition.  In  1913  Congress  revised  the  tariff  with  the 
purpose,  among  other  things,  of  removing  the  features  that  fostered 
monopolies,  and  several  acts  since  1887  have  endeavored  to  prevent 
personal  discrimination  in  railway  rates.  The  new  anti-trust  laws 
seek  to  remove  a  third  artificial  prop  supporting  monopolies,  by 
preventing  unfair  competition. 

What  these  laws  do  not  do  is  significant.  They  do  not  attempt 
to  regulate  the  prices  of  the  trust-made  goods  nor  prohibit  commun- 
ities of  interest.  If  monopolies  still  continue  to  make  secret  friend- 
ly agreements,  or  if  groups  of  individuals  owning  stock  in  different 
companies  still  continue  to  appoint  "dummy"  directors  of  these 
different  companies,  and  if  firms  do  not  see  fit  to  compete  but  pre- 
fer monopoly  profits,  it  is  difficult  to  see  why  this  new  legislation 
to  kill  the  trusts  will  be  more  successful  than  previous  laws  have 
been.     Time  will  show  the  effects  of  these  new  laws. 

69.  MONOPOLY  VALUE.  Monopoly  prices  are  determined  by 
the  laws  of  consumption  and  production  and  the  greed  of  the  mo- 
nopolist. The  main  law  of  consumption  involved  is  the  law  of 
elasticity  of  demand.  The  monopolist  wishes  to  secure  the  greatest 
possible  net  returns.  If  the  article  controlled  is  a  luxury  of  fairly 
wide  use  among  the  masses,  the  law  of  elasticity  of  demand  would 
induce  the  monopolist  to  keep  the  price  moderately  low,  possibly  only 


ELEMENTS  OF  ECONOMICS  119 

slightly  above  the  normal  competitive  rate,  since  a  high  price  would 
greatly  reduce  sales  and  diminish  net  returns.  In  case  of  a  neces- 
sity, however,  for  which  no  substitute  can  be  found,  the  monopolist 
has  the  public  at  his  mercy,  and  the  price  may  go  as  high  as  the 
monopolist  dares  to  put  it,  for  there  is  the  danger  of  government 
interference  if  the  wrath  of  the  people  is  aroused.  It  is  now  and 
then  discovered  that  some  monopolies  are  making  from  40  to  50  per 
cent  profits  and  sometimes  more. 

The  monopolist  also  takes  into  account  the  laws  of  production, 
especially  the  law  of  large-scale  production,  if  the  commodity  is 
one  for  which  the  demand  is  elastic.  In  that  case  the  greatest  net 
return  will  be  secured  by  setting  a  fairly  low  price  and  increasing  the 
sales.  The  interests  of  the  public  and  of  the  monopolist  coincide  only 
when  the  commodity  controlled  is  a  luxury  and  the  law  of  large-scale 
production  applies  to  it.  Unfortunately  the  chief  monopolies  con- 
trol the  necessities  of  life,  such  as  anthracite  coal,  kerosene  oil, 
lumber,  sugar,  farm  machinery,  steel  and  iron  goods,  and  many 
others. 

CHAPTER   VIII. 

Railroads. 

70.  IMPORTANCE  OF  RAILROADS.  Because  of  their  great 
importance  we  have  reserved  the  railroads  for  special  treatment, 
though  they  belong  with  natural  monopolies  considered  in  the  last 
chapter.  Both  from  their  size  and  their  industrial  and  social  im- 
portance railroads  are  by  far  the  most  important  single  group  of 
industries  in  the  country.  The  railroads  of  the  United  States  have 
245,000  miles  of  single  track,  over  61,000  locomotives,  over  2,200,000 
cars,  and  they  employ  1,910,000  men.  The  capitalized  value  of  the 
railroads  is  $20,000,000,000,  or  about  one-seventh  of  our  total  national 
wealth. 

The  industrial  and  social  importance  of  railroads  arises  chiefly 
from  three  characteristics,  the  enormous  size  of  the  business  unit, 


120  ELEMENTS  OF  ECONOMICS 

the  cheapening  of  the  cost  of  transportation,  and  monopoly.  The 
enormous  size  of  the  business  unit,  together  with  the  monopolistic 
character,  results  in  the  concentration  of  wealth  and  power  in  the 
hands  of  a  few.  The  cheapening  of  transportation  directly  lowers 
the  cost  of  living  and  indirectly  produces  the  same  results  by  allow- 
ing the  greater  extension  of  territorial  division  of  labor  than  would 
be  possible  without  the  railroad.  In  former  ages  industries  were  of 
a  local  nature  and  only  the  most  costly  goods  were  consumed  far 
from  the  place  of  production.  Now  we  can  obtain  in  great  quantities 
the  most  common  articles  from  the  most  distant  parts  of  the  world. 

The  cheapening  of  the  cost  of  transportation  has  produced  a 
new  industrial  revolution  as  important  as  the  first  one,  which  began 
in  England  in  1760.  This  new  industrial  revolution  is  typified  in  the 
giant  manufacturing  corporations  made  possible  by  securing  cheap 
bulky  materials  from  distant  sources  and  wide  markets  for  their 
products.  Another  phase  of  the  new  industrial  revolution  is  the  lo- 
calization of  industries  and  the  growth  of  great  cities  at  a  few  favor- 
ed spots,  such  as  New  York  and  Chicago.  Localization  of  industry 
may  result  from  natural  advantages  of  location  or  it  may  result  from 
the  artificial  advantage  of  lower  rates.  If  railroad  managers  wish 
to  build  up  any  city  in  which  they  have  a  personal  interest  they  can 
usually  accomplish  their  purpose  by  giving  that  city  lower  rates 
than  other  cities  are  given.  Thus  railroads  involve  problems  both 
of  production  and  distribution.  Owing  to  the  nature  of  the  railroad 
business  it  results  in  the  concentration  of  railway  capital  and  power 
in  a  few  men's  hands  and  it  aids  in  the  concentration  of  wealth  and 
power  in  other  lines  of  industry,  and  entirely  too  large  a  portion  of 
the  world's  products  goes  to  our  industrial  kings  and  princes. 

71.  A  NATURAL  MONOPOLY.  A  railroad  is  a  natural  mo- 
nopoly resulting  from  the  advantages  of  large-scale  production.  The 
chief  advantag-e  of  large-scale  operations  lies  in  the  more  economical 
use  of  a  large  fixed  capital.  The  cost  of  constructing  and  maintain- 
ing the  roadbed  and  track  is  about  the  same,  whether  there  are  two 


ELEMENTS  OF  ECONOMICS  121 

trains  a  day  or  twenty,  for  among  the  important  causes  of  wear  and 
tear  of  the  track  are  rains,  which  wash  away  embankments  and 
bridges,  the  rusting  of  the  rails,  and  the  rotting  of  the  ties.  And 
the  cost  of  running  a  train  of  ten  cars  is  not  much  greater  than  the 
cost  of  running  a  train  of  thirty  cars,  for  the  small  train  would  re- 
quire an  engineer,  a  fireman,  a  conductor,  and  one  or  two  brakemen, 
and  the  large  train  would  require  only  one  or  two  more  brakemen  and 
a  little  more  coal.  And  since  about  half  the  capital  of  a  railroad  is  in 
the  form  of  bonds,  interest  charges  remain  the  same,  whether  the 
traffic  is  heavy  or  light.  The  cost  in  salaries  for  the  higher  officials 
also  would  be  about  the  same  regardless  of  the  density  of  the  traffic. 
The  traffic  on  a  single  track  might  easily  become  so  dense  that  it 
would  not  pay  to  increase  it;  but  another  track  can  be  laid  without 
increasing  the  expense  in  several  items,  notably,  the  cost  of  super- 
intendence, terminal  facilities,  and  right  of  way.  If  two  tracks  are 
not  enough,  four,  six,  eight,  or  more  tracks  may  be  laid,  and  the 
advantages  of  large-scale  production  still  applies.  Hence,  one  rail- 
road company  could  handle  all  the  traffic  that  could  conceivably  exist 
between  two  cities  or  localities. 

As  a  result  of  these  characteristics,  if  two  or  more  roads  run 
between  two  cities  fierce  competition  results.  If  one  road  can  carry 
all  the  traffic  at  a  cheaper  rate  than  it  can  carry  half  of  it  there 
is  a  temptation  to  lower  the  rates  to  get  the  traffic  of  rivals.  By 
lowering  rates,  say  one  or  two  per  cent,  the  volume  of  the  traffic 
might  be  increased,  say,  one-third,  and  the  net  receipts  be  greatly  in- 
creased. But  the  rival  road  in  order  to  hold  its  traffic  lowers  its 
rates  and  possibly  goes  below  the  rates  of  the  other  road.  Then 
there  is  another  drop.  This  may  continue  until  profits  are  wiped 
out  and  one  or  both  roads  become  bankrupt,  and  maybe  go  into  the 
hands  of  receivers.  The  only  way  to  prevent  these  disastrous  results 
is  to  form  some  kind  of  consolidation  by  which  competition  is  elim- 
inated, and  then  rates  may  be  raised  above  the  competitive  level, 
and  large  dividends  result.     Thus  competition  seems  to  be  impossible 


122  ELEMENTS  OF  ECONOMICS 

in  the  railway  world"  and  monopoly  is  the  inevitable  result.  In  an 
address  before  the  American  Economic  Association  at  Minneapolis^ 
December  29,  1913,  Mr.  B.  F.  Meyer  of  the  Interstate  Commerce  Com- 
mission said,  "There  are  survivals  of  the  competitive  rate,  but  the 
merest  novice  in  the  railway  history  of  the  leading  countries  of  the 
world  knows  that  competition  alone  has  nowhere  permanently  se^ 
cured  to  the  public  reasonably  adequate  service  at  reasonable  rates, 
and  in  consequence  practically  the  world  over  the  competitive  theory 
of  railway  rate-making  has  been  abandoned." 

72.  RAILWAY  DEVELOPMENT  IN  U.  S.  TO  1850.  A  brief 
review  of  the  railway  history  of  the  United  States  will  reveal 
the  natural  t  endency  of  railroads  to  grow  in  size  until  a  single 
road  or  combination  of  roads  monopolizes  the  traffic  of  a  large  ter- 
ritory. During  the  first  twenty  years  of  their  existence  railroads 
were  small  local  affairs  and  built  largely  with  local  capital.  The  pos- 
sibilities of  the  railroad  were  not  known  and  every  undertaking 
was  an  experiment,  hence  only  a  small  amount  of  capital  would  be 
invested  in  any  one  venture.  There  were,  for  example,  about  twelve 
roads  between  Albany  and  Buffalo,  each  with  a  track  of  different 
width.  Consequently,  railways  were  very  inefficient  as  compared 
with  great  trunk  lines  and  systems  with  their  through-freight  and 
passenger  traffic.    Engines  were  also  small  and  ineffective. 

Owing  to  this  inefficiency  of  the  early  railroads  it  was  not  sup- 
posed that  they  could  ever  compete  with  waterways  in  carrying 
cheap  bulky  goods.  As  late  as  1850,  the  main  use  of  railways  was 
to  connect  different  systems  of  waterways.  Buffalo  was  the  only  city 
west  of  the  Atlantic  Slope  that  had  rail  connection  with  the  Sea 
Board.  In  the  West  there  were  but  a  few  short  roads  connecting- 
lakes,  canals  or  rivers.  Pittsburg,  Chicago,  St.  Louis,  New  Orleans, 
were  without  railway  connections  with  the  outside  world. 

73.  DEVELOPMENT  OF  COMPETING  SYSTEMS— 1850-1870, 
Between  1850  and  1870  three  great  movements  stand  out  prominently, 
a  great  increase  in  mileage,  the  development  of  the  railways  as  a 


ELEMENTS  OF  ECONOMICS  123 

system  of  transportation  independent  of  waterways,  and  the  con- 
solidation of  short  end  to  end  lines  into  a  continuous  line.  The 
causes  of  this  expansion  of  the  railways  were  improvements  in  lo- 
comotives, cars,  the  track,  and  better  business  management.  In 
1853  Chicago  was  connected  with  New  York  and  the  East  by  a  con- 
tinuous chain  of  separate  roads.  In  1859  New  Orleans  was  connected 
with  Chicago  and  the  East,  and  by  1869  there  were  three  lines  be- 
tween Omaha  and  Chicago,  and  the  Union  Pacific  and  the  Central 
Pacific  together  spanned  the  immense  distance  between  Omaha  and 
San  Francisco.  Thus  was  developing  a  vast  system  of  railroads  in- 
dependent of  waterways. 

Between  the  Atlantic  Coast  and  Chicago  four  lines  of  railroad 
were  developing,  now  known  as  the  New  York  Central,  the  Erie,  the 
Pennsylvania,  and  the  Baltimore  &  Ohio.  Vanderbilt,  one  of  the  first 
great  railroad  kings,  got  possession  of  the  eleven  short  lines  between 
Albany  and  Buffalo  in  1853,  and  in  1869  added  to  the  system  the 
Hudson  River  Railroad,  thus  securing  one  system  between  New 
York  and  Buffalo,  and  during  the  same  year  connection  was  secured 
with  Chicago.  During  the  same  eventful  year  in  the  railway  world 
the  Pennsylvania  Railroad  secured  connections  with  Chicago,  and 
within  four  or  five  years  the  Erie,  the  Baltimore  &  Ohio,  and  the 
Grand  Trunk  were  competitors  for  through  traffic  between  the  Mis- 
sissippi Valley  and  the  Atlantic  Coast  cities.  With  five  competing 
lines  in  the  eastern  field  and  three  between  Omaha  and  Chicago,  and 
with  a  traffic  sts  yet  comparatively  light,  conditions  were  favorable 
for  railway  rate  wars  in  different  parts  of  the  country. 

74.  POOLS,  1870-1887.  The  first  part  of  this  period  was  char- 
acterized by  destructive  competition  and  the  last  part  by  the  forma- 
tion of  pools.  •  In  1868  the  rate  on  first-class  freight  from  Chicago 
to  New  York  was  $1.88  per  hundred  pounds  and  the  rate  on  fourth- 
class  goods  was  $0.82.  When  the  New  York  Central  and  the  Pennsyl- 
vania roads  entered  Chicago  the  rate  dropped  to  25  cents  a  hundred 
on  all  classes  of  freight.     Such  a  low  rate  was  ruinous  and  a  truce 


124  ELEMENTS  OF  ECONOMICS 

was  patched  up.  But  when  the  Baltimore  &  Ohio  and  the  Grand 
Trunk  reached  Chicago  the  war  began  the  second  time  and  first- 
class  rates  fell  to  25  cents  a  hundred  and  fourth-class  rat-es  to  16 
cents.  All  the  roads  became  exhausted  and  a  pool  was  formed  in 
1877.  Other  pools  had  been  formed  in  other  parts  of  the  country, 
the  earliest  of  importance  being  the  Chicago-Omaha  pool. 

The  general  results  of  these  pools  were  to  establish  fairly  low 
rates  at  competitive  points,  but  very  high  rates  at  non-competitive 
points.  The  farmers  throughout  the  northwest  felt  that  the  rail- 
roads, which  had  been  granted  immense  tracts  of  land  and  often 
voted  sums  of  money  to  help  them  build  their  roads,  were  unjust 
and  ungrateful.  In  the  meantime  farmers*  organizations,  called 
Granges,  had  been  formed  for  general  improvement  of  the  condi- 
tions of  rural  life.  These  organizations  turned  their  energies  against 
the  railroads  and  the  so-called  Granger  laws  were  passed  in  several 
states.  Rates  were  usually  fixed  so  low  that  the  roads  were  ruined 
and  the  laws  had  to  be  repealed  or  modified.  Then  state  commis- 
sions were  established,  some  with  power  to  fix  rates,  others  merely 
with  power  to  investigate  and  publish  the  general  condition  of  the 
railroads.  These  commissions  were,  not  very  effective  and  different 
systems  of  regulations  in  different  states  interfered  with  interstate 
traffic.  This  made  it  necessary  for  the  national  government  to  regu- 
late interstate  traffic  and  the  next  year  Congress  passed  the  first 
great  national  law  regulating  railroads.  Before  taking  up  the  study 
of  that  act  and  its  results  it  is  necessary  to  consider  the  general 
subject  of  rate-making  and  certain  evils  that  had  developed  in  con- 
nection with  it. 

75.  RATE-MAKING.  Experience  has  shown  that  a  uniform  rate 
per  ton-mile  on  all  kinds  of  goods  does  not  bring  the  highest  net  re- 
turns. If  a  high  rate  is  established  cheap  bulky  goods  will  not  be 
shipped  long  distances  and  light  valuable  goods  will  not  afford  suffi- 
cient income.  If  the  rate  is  low,  cheap  bulky  goods  will  be  shipped 
in  great  quantities,  but  less  will  be  obtained  from  the  light  valuable 


ELEMENTS  OF  ECONOMICS  125 

goods,  since  a  low  rate  will  not  materially  increase  the  volume  of 
such  traffic.  This  leads  to  the  classification  of  goods  and  establish- 
ing a  different  rate  for  each  class,  the  rate  varying  with  the  value  of 
the  goods.  This  is  a  discrimination  against  the  valuable  goods,  but 
since  the  freight  charges  on  such  goods  would  be  but  a  small  portion 
of  their  price,  the  burden  does  not  seem  great,  and  is  not  a  serious 
hindrance  to  business.  This  policy  is  often  called  charging  what  the 
traffic  will  bear.  This  is  usually  taken  by  the  public  to  mean  an 
unjust  policy  by  which  the  people  are  robbed.  If  properly  pursued, 
however,  charging  what  the  traffic  will  bear  is  beneficial  to  the 
country,  because  cheap  bulky  goods  can  be  brought  from  distant 
parts  of  the  world,  the  available  supply  increased  and  prices  lowered. 
Another  form  of  discrimination  is  also  beneficial  both  to  the 
railroads  and  to  the  people,  and  for  reasons  similar  tp  those  that 
make  discrimination  between  different  classes  of  goods  beneficial  to 
botli*the  railroads  and  the  people.  This  is  called  market  discrimina- 
tion and  means  giving  lower  rates  per  ton-mile  to  goods  far  from  the 
market  than  are  charged  for  the  same  kind  of  goods  produced  nearer 
the  market.  This  might  be  called  distance  discrimination.  This 
policy  allows  the  wheat  and  other  products  from  the  far  northwest  to 
be  shipped  to  Chicago,  New  York,  or  even  London,  and  the  railroads 
make  more  profits  and  the  people  get  cheaper  food.  And  even  the 
farmers  near  the  market  may  get  lower  rates  with  discrimination 
than  without  it,  because,  without  the  additional  traffic  the  low  rates 
on  the  long  haul  bring,  rates  would  be  higher  on  the  shorter  haul  in 
order  to  earn  dividends,  for  it  must  be  remembered  that  a  railroad 
obeys  the  law  of  large-scale  production.  The  farmers  nearer  market 
would,  however,  lose  by  the  fall  in  prices  resulting  from  the  increase 
of  the  supply  of  farm  products,  but  the  majority  of  people  would  be 
gainers. 

A  third  form  of  discrimination  is  known  as  place  discrimination 
and  is  usually  referred  to  as  the  long-  and  short-haul  evil.  When 
railroads  are  competing  at  certain  points  for  through  traffic  or  agree 


126  ELEMENTS  OF  ECONOMICS 

to  maintain  a  fairly  low  rate  at  such  points,  each  road  will  naturally 
charge  high  rates  at  non-competitive  points.  To  illustrate.  Several 
roads  run  between  Omaha  and  Chicago,  but  places  between  these  two 
cities  may  have  but  one  railroad.  Rates  from  Omaha  to  Chicago 
were  lower  than  from,  say  Atlantic,  Iowa,  to  Chicago,  not  only  lower 
per  ten-mile,  but  the  total  freight  charges  were  less.  This  policy  is 
injurious  to  all  sections  of  the  country  discriminated  against  and 
tends  to  build  up  great  overgrown  cities  at  the  favored  points,  and 
is  on  the  whole  harmful  to  the  country,  since  it  means  monopoly  gains 
at  the  expense  of  a  portion  of  the  community  without  necessarily 
benefiting  the  country  as  a  whole  by  increasing  the  available  supply 
of  goods. 

Another  evil  that  developed  was  personal  discrimination.  Low 
rates  were  granted  to  some  company  and  this  favor  enabled  the  com- 
pany to  undersell  its  rivals  and  build  up  a  great  monopoly.  When 
rivals  were  disposed  of,  prices  went  up  to  monopoly  rates.  Sonf^  of 
the  greatest  monopolies  were  thus  built  up,  the  Standard  Oil  Com- 
pany being  a  good  example. 

A  third  evil  that  grew  up,  also  closely  connected  with  rate- 
making,  was  stock-watering.  When  legislatures  and  commissions  be- 
gan to  fix  rates,  the  railroads  sought  to  evade  the  results  of  this 
regulation  by  concealing  real  profits  and  making  them  appear  much 
less  than  they  were.  In  various  ways  the  amount  of  capital  stock 
was  increased  without  increasing  the  amount  of  money  invested. 
Rates  must  be  high  enough  to  allow  a  reasonable  profit,  and  if  the 
capital  can  be  made  to  appear  twice  as  great  as  it  really  is,  what 
would  appear  as  a  reasonable  rate  would  be  much  higher  than  it 
ought  to  be. 

76.  THE  INTERSTATE  COMMERCE  ACT  OF  1887.  These 
evils  and  the  Supreme  Court  decision  of  1886  preventing  the  states 
from  regulating  interstate  commerce  led  to  the  passage  of  the  Inter- 
state Commerce  Act  of  1887.  The  three  main  purposes  of  the  act 
were  to  prevent  monopoly  and  discriminations  and  to  regulate  rates. 


ELEMENTS  OF  ECONOMICS  127 

In  order  to  prevent  monopoly  the  railroads  were  forbidden  to  form 
pools,  and  in  order  to  induce  competition,  rates  were  to  be  published. 
Rates  were  to  be  reasonable,  and  unreasonable  discriminations  of  all 
kinds,  personal,  place,  market,  and  between  commodities,*  were  pro- 
hibited. The  long-  and  short-haul  evil  was  especially  aimed  at  by  pro- 
viding that  no  common-carrier  subject  to  the  act  should  charge  more 
for  a  short-haul  than  for  a  long-haul,  if  the  short-haul  were  included 
in  the  longer  and  if  substantially  the  same  conditions  prevailed.  A 
commission  was  established  with  the  power  and  duty  of  enforcing  the 
act. 

The  general  principle  upon  which  this  act  is  based  is  that  com- 
petition can  and  should  prevail.  If  Congress  had  accepted  the  prin- 
ciple that  railroads  are  natural  monopolies  and  that  consequently 
competition  is  out  of  the  question,  pools  would  not  have  been  pro- 
hibited but  welcomed  as  a  means  of  preventing  useless  rate  wars; 
and  in  order  to  prevent  pools  from  resulting  in  injury  to  the  public 
the  pools  would  have  been  placed  under  the  supervision  of  the  Com- 
mission. In  other  leading  countries  of  the  world,  unless  the  railroads 
are  owned  by  the  public,  railway  combinations  are  not  only  allowed 
but  required,  and  the  combinations  are  under  government  supervision. 
This  is  the  most  effective  way  to  prevent  the  various  forms  of  in- 
jurious discriminations.  If  the  roads  of  each  natural  division  of  the 
country  are  combined,  the  big  shipper  cannot  extort  special  favors 
from  the  railroads  by  threatening  to  ship  his  goods  over  another 
line.  The  long-  and  short-haul  discrimination  would  also  be  more 
easily  prevented,  because  with  combination  there  is  no  special  reason 
for  favoring  any  locality,  unless  the  railway  managers  have  a  personal 
interest  in  that  locality.  Congress  did  not  wholly  rely  on  competition, 
however,  as  is  shown  by  the  provision  that  rates  should  be  reasonable. 
It  would  seem,  however,  that  a  better  policy  would  have  been  to  allow 
combinations  to  take  their  natural  course  and  then  give  the  commis- 
sion adequate  power  to  regulate  rates  and  other  phases  of  the  rail- 
way business  where  there  is  danger  of  injury  to  the  public. 


128  ELEMENTS   OF   ECONOMICS 

77.  RESULTS  OF  THE  ACT.  The  act  was  much  less  effective 
than  its  authors  anticipated,  partly  because  the  courts  interpreted 
the  law  in  such  a  manner  as  to  prevent  the  commission  from  exercis- 
ing certairf  powers  that  were  supposed  to  have  been  conferred  upon 
it.  It  was  intended,  for  instance,  that  the  commission  should  have 
full  power  to  decide  the  facts  in  any  case  and  that  the  courts  could 
review  only  the  points  of  law.  The  courts,  however,  reviewed  both 
law  and  facts,  and  even  allowed  the  railroads  to  introduce  new  evi- 
dence. The  railroads  took  advantage  of  this  and  purposely  withheld 
part  of  their  evidence  in  cases  before  the  commission  and  thus  often 
secured  in  the  courts  a  reversal  of  the  decision  of  the  commission,  • 
which  greatly  weakened  its  power.  Owing  to  this  practice  and  other 
causes  of  delay  cases  were  often  dragged  on  for  eight  or  nine  years. 
With  such  delays  shippers  had  little  hope  of  securing  justice. 

The  Supreme  Court  also  limited  the  power  of  the  commission  in 
fixing  rates.  The  commission  undertook  to  establish  what  it  consid- 
ered reasonable  rates.  But  the  court  decided  that  the  act  conferred 
upon  the  commission  power  to  decide  when  a  rate  was  unreasonable 
but  not  to  say  what  the  rate  should  be.  This  practically  nullified 
the  power  of  the  commission  to  regulate  rates. 

By  interpretation  of  the  courts  all  the  meaning  was  taken  out  of 
the  long-  and  short-haul  provision.  The  law  allowed  the  railroads  to 
charge  more  for  a  short-haul  than  for  a  long-haul  where  conditions 
were  sufficiently  unlike  to  justify  it.  The  Supreme  Court  decided 
that  competition  with  other  roads  was  a  condition  that  justified 
charging  more  for  a  short-haul  than  for  a  long-haul.  This  destroyed 
the  power  of  the  commission  to  prevent  this  evil  and  enabled  the 
railroad  to  fix  rates  as  they  chose  where  any  competition  existed. 

78.  RECENT  LEGISLATION.  Several  acts  have  been  passed 
by  Congress  within  the  last  few  years  greatly  extending  the  powers 
of  the  Interstate  Commerce  Commission.  In  1906  the  Hepburn  Act 
subjected  the  railroads,  and  other  common  carriers,  such  as  express 
companies,  private-car  companies,  pipe  lines  and   sleeping-car  com- 


ELEMENTS  OF  ECONOMICS  139 

panies,  to  which  the  jurisdiction  of  the  Commission  was  extended, 
to  more  strict  regulation.  Among  the  most  important  provisions 
four  were  of  special  significance  as  showing  the  tendency  of  public 
opinion  towards  increasing  governmental  control  of  monopolies.  The 
powers  of  the  Commission  were  increased  so  as  to  secure  honest  and 
uniform  methods  of  accounting,  rebates  and  all  other  special  favors 
were  specifically  prohibited,  railroads  were  forbidden  to  carry  ar- 
ticles of  their  own  production  except  timber,  and,  most  important  of 
all,  the  Commission  was  empowered  to  fix  maximum  rates.  The  pro- 
hibition on  carrying  goods  of  their  own  production  was  intended  to 
prevent  such  a  monopoly  as  has  developed  in  the  coal  districts  of 
Pennsylvania,  where  the  railroads  were  gaining  control  of  the  coal 
mines. 

The  Mann-Elkins  Act  of  1910  further  increased  the  powers  of  the 
Commission.  An  advance  in  rates  can  be  suspended  by  the  Commis- 
sion, pending  investigations  as  to  reasonableness.  The  long-  and  short- 
haul  question  was  put  completely  under  the  control  of  the  Commis- 
sion. In  order  to  prevent  delay  in  the  courts  a  new  court  was  es- 
tablished called  th^  Commerce  Court.  It  was  supposed  that  such  a 
court  would  be  more  familiar  with  the  railroad  business  than  are  the 
regular  courts  and,  since  the  new  court  would  give  its  time  exclus- 
ively to  such  cases,  appeals  from  the  decisions  of  the  Commission 
would  not  cause  injurious  delay  of  justice.  The  new  court,  however, 
proceeded  to  curtail  the  powers  of  the  Commission,  deciding,  among 
other  things,  that  the  Commission  could  not  work  out  any  general 
rate  schedule  but  must  decide  only  individual  cases.  The  Supreme 
Court  reprimanded  the  Commerce  Court  for  exceeding  its  powers, 
and  the  Commission  continued  to  administer  the  laws  as  Congress 
intended.  The  action  of  the  Commerce  Court  in  this  and  other  mat- 
ters brought  it  into  some  disfavor  and  the  climax  was  reached  when 
Judge  Archibald  of  that  court  was  impeached  for  high  crimes,  and 
in  1913  Congress  abolished  the  Commerce  Court,  its  work  being 
given  to  the  Circuit  Courts  of  Appeal. 


130  ELEMENTS  OF  ECONOMICS 

In  1913  Congress  passed  an  act  authorizing  the  Commission  to 
undertak-e  the  physical  valuation  of  railroads.  This  will  take  several 
years,  and  the  use  that  will  be  made  of  such  a  valuation  is  a  matter 
of  speculation.  Some  think  that  rates  will  then  be  based  upon 
physical  valuation  rather  than  on  the  amount  of  stock  issued;  others 
think  this  will  not  be  done,  since  it  is  generally  supposed  that  rail- 
roads have  been  greatly  overcapitalized.  Some  observers  believe 
the  physical  valuation  may  be  the  first  move  towards  government 
ownership  of  the  railroads. 

79.  THE  PRESENT  SITUATION.  The  effect  of  all  these  laws 
has  been  to  make  the  Commission  a  real  power  in  the  railway  world. 
The  marked  success  of  the  Commission  led  to  the  establishment  of 
the  Trade  Commission  to  regulate  monopolies  in  manufacturing  and 
commercial  industries.  Discriminations  of  all  sorts  seem  to  have  been 
abolished  to  such  an  extent  that  they  are  no  longer  a  serious  evil. 
Power  to  regulate  rates  and  some  other  matters  has  been  made  ab- 
solute and  complete  by  this  recent  legislation  and  decisions  of  the  Su- 
preme Court.     Thus  the  main  evils  of  monopoly  have  been  abolished. 

All  the  laws  of  both  state  and  nation  have  not  been  able,  how- 
ever, to  prevent  combinations  and  agreements  of  various  kinds  that 
practically  eliminate  competition.  This  has  helped  the  Commission 
and  the  courts  in  their  fight  against  discriminations  and  to  that  ex- 
tent monopoly  has  had  beneficial  results.  The  power  of  the  Commis- 
sion to  regulate  rates  enables  it  to  prevent  the  main  evil  resulting 
from  monopoly,  but  other  evils  of  monopoly  still  remain,  especially 
the  lack  of  competition  in  giving  good  service. 

There  has  been  several  spectacular  dissolutions  of  railway  com- 
binations since  the  passage  of  the  Anti-Trust  Laws,  which  applied 
to  railroads  in  so  far  as  they  prohibited  monopoly.  In  the  famous 
Northern  Securities  case  (1904),  the  Supreme  Court  decided  that  the 
holding  company  formed  in  order  to  combine  the  three  great  roads 
that  serve  the  Northwest,  the  Northern  Pacific,  the  Great  Northern, 
and  the  Burlington,  was  illegal  and  the  Northern  Securities  Company 


ELEMENTS  OF  ECONOMICS  131 

was  dissolved.  Competent  observers  declare,  however,  that  no  com- 
petition exists  among  these  roads,  which  are  controlled  by  the  Hill 
interests.  Another  famous  dissolution  case  was  that  involving  the 
Union  Pacific  and  Southern  Pacific  roads  (1913),  in  which  the  court 
held  that  both  interlocking  directorates  and  the  community  of  in- 
terest were  illegal.  The  formal  connections  between  the  two  roads 
have  been  severed;  but  the  same  men  that  were  associated  in  the  con- 
trol of  the  two  roads  are  in  control  of  each  company,  and  there  seems 
to  be  no  reason  to  suppose  that  the  two  roads  will  compete  in  the 
future.  One  of  the  latest  cases  is  that  in  which  the  New  York,  New 
Haven  and  Hartford  was  compelled  to  dispose  of  the  stock  of  the  Bos- 
ton and  Maine  railroad.  These  two  roads  had  long  controlled  the 
transportation  business  in  New  England,  and  some  years  ago  they 
were  united  by  the  purchase  of  stock.  The  dissolution  is  too  recent 
to  enable  us  to  judge  of  results. 

Despite  these  and  other  attacks  on  railroad  combinations,  con- 
solidation and  combination  have  steadily  continued  up  to  the  present 
time.  In  1913  there  were  in  the  United  States  ten  or  eleven  well  de- 
fined systems.  Of  the  245,000  miles  of  railroad  in  the  country,  eleven 
systems  controlled  200,000  miles.  There  is  a  strong  tendency  for 
consolidation  to  proceed  on  a  territorial  basis.  Northern  New  England 
is  controlled  by  the  Boston  and  Maine,  southern  New  England  by  the 
New  York,  New  Haven  and  Hartford;  the  Vanderbilt  system  con- 
trols the  northern  portion  of  the  Middle  States  and  westward  to 
Chicago,  the  Pennsylvania  system  the  southern  portion  of  that  terri- 
tory; the  territory  north  and  west  of  Chicago  to  the  Pacific  Coast  is 
dominated  by  the  Hill  interests;  and  in  other  parts  of  the  country 
each  natural  division  is  coming  under  the  control  of  some  single  sys- 
tem. The  same  results  have  been  reached  in  other  countries  where 
the  railroads  are  privately  owned,  which  is  additional  proof  that  rail- 
roads are  natural  monopolies. 

Two  changes  in  policy  have  b-een  strongly  urged  and  bills  em- 
bodying them  have  been  at  various  times  introduced  into  Congress. 


132  ELEMENTS   OF   ECONOMICS 

These  changes  are  to  allow  railroads  to  combine  under  the  super- 
vision of  the  Interstate  Commerce  Commission,  and  secondly,  that 
the  Commission  be  given  power  to  control  the  issue  of  stock.  The 
feeling  is  prevalent  among  the  people  that  railroads  have  been  over- 
capitalized, and  that  dividends  are  being  paid  on  stock  that  is  half 
"water."  If  this  is  true  it  is  an  unjust  burden  upon  the  people.  Even 
if  rates  are  to  be  based  upon  physical  values  when  they  have  been 
estimated,  the  issue  of  stock  would  seem  to  be  a  proper  subject  of 
regulation  as  a  protection  to  investors.  The  question  of  permitting 
combinations  has  already  been  discussed. 

Most  of  the  states  have  established  commissions  with  large 
powers,  among  them  being  the  power  to  fix  maximum  rates  of  traffic 
within  the  state  and  the  power  to  control  stock  issues.  These  regula- 
tions are  not  uniform,  and  control  of  stock  issues  by  the  National 
Government  is  needed  for  this  reason  also.  The  power  of  these  com- 
missions has  been  considerably  curtailed  by  recent  court  decisions. 
Two  cases  will  illustrate  this  tendency.  About  two  years  ago  the 
Supreme  Court  decided  that  the  laws  of  Congress  requiring  certain 
safety  devices  applied  to  a  railroad  lying  wholly  within  a  state,  on 
the  ground  that  all  railroads  are  .practically  a  part  of  the  great 
national  system,  since  goods  transported  over  roads  lying  wholly 
within  a  state  enter  into  interstate  commerce.  In  another  case  the 
court  decided  that  a  two  cent  railway  rate  was  invalid  since  it  dis- 
criminated against  interstate  passengers,  a  higher  rate  having  been 
allowed  on  interstate  commerce  by  the  Interstate  Commerce  Com- 
mission. The  governors  in  their  next  annual  conference  protested 
against  these  decisions  as  invasions  of  state  rights. 

80.  PUBLIC  OWNERSHIP.  Owing  to  the  marked  success  of 
government  regulation,  there  is  less  agitation  than  formerly  for  pub- 
lic ownership  of  railroads,  but  there  is  a  strong  undercurrent  of 
opinion  in  favor  of  that  policy,  many  high  railway  officials  recog- 
nizing this  current  of  opinion  and  even  welcoming  it  as  a  relief  from 
the  vexation  of  stringent  regulation.     Labor  unions  are  demanding 


ELEMENTS  OF  ECONOMICS  133 

higher  wages,  stockholders  demand  larger  dividends  and  the  Inter- 
state Commerce  Commission  insists  on  keeping  rates  low  for  the 
welfare  of  the  public,  and  railroad  officials  find  themselves  in  a 
difficult  position. 

The  arguments  for  and  against  public  ownership  of  railroads 
are  much  the  same  as  those  previously  considered  under  municipal 
ownership.  Under  public  ownership  the  constant  struggl-e  between 
the  government  and  the  railroads  would  cease  and  under  a  wise  and 
efficient  government  railroads  would  be  made  to  serve  the  public. 
The  relative  efficiency  of  government  management  and  private 
management  is  yet  an  open  question,  but  the  weight  of  opinion  seems 
to  favor  private  management,  on  the  ground  that  a  more  effective 
civil  service  system  can  be  employed  by  a  private  company  than  by 
the  government,  and  because  the  hope  of  securing  large  profits  is  a 
greater  stimulus  to  invention  and  enterprise  than  any  rewards  the 
government  will  offer.  Many  believe  that  until  Congress  shows  less 
inclination  to  practice  log-rolling  m-ethods  and  to  emphasize  local 
rather  than  general  interests,  it  would  be  extremely  hazardous  to 
place  the  management  of  railroads  completely  under  the  control  of 
the  government. 


134  ELEMENTS  OF  ECONOMICS 

CHAPTER  IX. 

Value. 

81.  INTRODUCTION.  We  have  thus  far  considered  two  of  the 
four  main  divisions  of  economic  science,  consumption  and  distribu- 
tion, and  we  now  take  up  the  third  division,  exchange,  which  involves 
value,  money,  credit,  banking  and  international  trade.  The  central 
topic  in  exchange  is  value,  which  we  have  previously  defined  as  power 
in  exchange.  The  problem  in  value  is  to  determine  why  one  thing 
exchanges  for  another  thing  in  certain  proportions,  why,  for  exam- 
ple, one  pound  of  sugar  is  worth  about  twice  as  much  as  a  pound  of 
flour;  why  a  yard  of  silk  of  a  certain  quality  is  worth  so  many  pounds 
of  sugar,  or  why  a  ton  of  hay  is  worth  three  or  four  tons  of  coal. 
Money,  credit  and  banking  are  the  instruments  of  exchange. 

Value  involves  the  laws  both  of  consumption  and  production,  and 
some  economists  treat  of  value  not  as  a  separate  topic  but  in  con- 
nection with  production  and  consumption  and  other  subjects.  Nothing 
is  gained  in  clearness  by  such  treatment,  however,  since  value  is  a 
topic  distinguishable  from  other  topics  and  having  its  own  laws, 
though  the  elements  of  those  laws  lie  in  other  fields. 

82.  ADVANTAGES  OF  EXCHANGE.  The  main  economic  ad- 
vantages of  exchange  are  the  same  as  the  advantages  of  the  division 
of  labor,  since  exchange  results  from  the  division  of  labor.  Exchange 
allows  division  of  labor  both  at  home  and  between  different  countries. 
Moreover,  since  people  have  different  tastes,  exchange  allows  each 
person  to  dispose  of  things  of  little  value  to  him  but  which  may  be 
very  useful  to  others,  and  thus,  by  exchange,  value  is  increased.  It 
is  often  assumed  both  by  individuals  and  by  nations  that  exchange 
is  a  one-sided  affair,  since  only  one  of  the  two  parties  involved  de- 
rives any  benefit.  And,  curiously  enough,  it  is  assumed  that  the 
person  that  sells  rather  than  the  one  that  buys  gets  the  chief  benefit. 
This  notion  is  reflected  in  the  laws  of  trade  during  the  last  three  or 
four  hundred  years,  which  seek  to  restrict  imports  and  encourage  ex- 


ELEMENTS   OF   ECONOMICS  135 

ports.  Since  the  one  who  sells  disposes  of  what  he  does  not  want  and 
the  one  who  buys  gets  what  he  wants,  it  would  follow  that  if  either 
of  the  two  parties  to  an  exchange  is  the  chief  gainer  it  is  the  one 
who  buys.  But  on  the  whole  there  is  no  reason  to  suppose  that  either 
party  is  the  chief  gainer,  since  exchange  allows  the  seller  to  dispose 
of  what  he  does  not  need  and  get  what  he  needs. 

Exchange  is  also  a  great  civilizer,  since  in  the  course  of  inter- 
national trade  ideas  are  also  exchanged.  In  ancient  days  the  trader 
found  his  way  across  the  desert  between  Egypt  and  Chaldea  and  set 
the  world  a-mixing.  The  Phoenician  of  the  ancient  world  carried 
the  ideas  of  the  East  to  the  rising  West,  and  the  progress  of  the 
New  World  of  that  day  was  hastened.  Medieval  traders  carried 
the  Renaissance  from  the  South  and  East  to  the  North  and  West, 
and  the  vigorous,  half-barbarians  of  newer  regions  became  more  re- 
fined and  enlightened  by  the  best  ideas  of  the  race,  ideas  that  had 
survived  many  an  empire  and  that  still  survive,  and  to  the  end  of  time 
will  help  to  make  man  more  noble. 

83.  MARKET  VALUE  AND  NORMAL  VALUE.  The  term  mar- 
ket has  various  meanings.  In  one  sense  it  means  a  certain  place 
^vhere  things  are  bought  and  sold,  usually  a  certain  city,  as  the 
Boston  Market  or  the  New  York  Market.  In  another  sense  it  means 
the  commercial  world  in  general,  as  when  we  say  a  commodity  is 
put  on  the  market.  But  when  we  speak  of  marlfet  price,  both  a 
place  and  a  condition  are  included.  It  implies  a  place,  either  local 
or  general,  where  goods  are  bought  and  sold  and  where  conditions 
are  such  that  each  commodity  sells  at  a  uniform  price.  This  ideal 
condition  is,  however,  only  roughly  realized,  especially  in  the  case 
of  retail  trade.  In  the  wholesale  business  both  buyers  and  sellers 
are  keen,  and  a  slight  difference  in  price  on  large  sales  might  make 
or  mar  one's  fortune,  hence,  wholesale  prices  must  be  quite  uniform 
in  any  locality.  In  the  retail  trade,  however,  only  one  party  to  the 
bargain  is  usually  keen  and  fully  alive  to  changes  in  industrial  con- 
ditions,  buyers   often   paying   what   is   asked   without   question,   and 


136  ELEMENTS  OF  ECONOMICS 

not  a  very  close  watch  is  kept  upon  the  prices  of  different  dealers. 

Market  value  is  simply  the  price  at  which  a  commodity  sells  in 
the  market.  Normal  value  is  the  value  or  price  that  gives  a  normal 
rate  of  profit.  For  long  periods  of  time  the  normal  value  and  the 
market  value  would  tend  to  coincide;  but  for  short  periods  the  mar- 
ket value  may  go  above  or  below  the  normal  value.  In  times  of  in- 
dustrial depression  market  prices  often  do  not  pay  expenses,  while 
in  "boom"  times  that  follow  an  industrial  depression  market  prices 
rise  above  the  average,  and  more  than  ordinary  profits  are  made. 
There  is  much  indefiniteness  about  "normal"  profits,  because  differ- 
ent men  are  making  different  rates  of  profit.  There  is,  therefore, 
much  indefiniteness  about  normal  value;  but  for  all  practical  pur- 
poses the  terms  normal  value  and  normal  profits  are  sufficiently  defi- 
nite t&  be  understood.  The  average  business  man  would  probably 
consider  from  five  to  eight  per  cent  normal  profits,  and  in  fixing 
prices  would  attempt  to  secure  at  least  that  rate. 

Market  value  and  normal  value  are  usually  treated  separately 
by  economists,  and  the  general  impression  conveyed  is  that  the  twa 
are  governed  by  different  forces,  market  value  being  governed  by 
demand  and  supply  and  normal  value-  by  cost  of  production.  But  both 
sets  of  forces  are  at  work  all  the  time  governing  the  price  of  a  com- 
modity, whether  we  consider  the  price  as  the  market  or  the  normal 
price.  The  price  of  everything  that  sells  in  the  market  is  determined 
to  some  extent  by  its  cost,  except  in  a  few  rare  cases,  as  antique 
furniture,  the  paintings  of  the  great  masters,  and  things  of  similar 
character.  The  force  of  demand  and  supply,  or  of  marginal  utility^ 
may  cause  the  price  for  a  time  to  go  far  above  or  far  below  the  nor- 
mal, but  both  buyer  and  seller,  especially  in  the  wholesale  trade, 
keep  the  factor,  cost,  constantly  in  mind  and  are  governed  by  it. 
Hence,  it  seems  best  to  disregard  the  distinction  between  market  value 
and  normal  value  when  the  forces  governing  value  are  under  con- 
sideration. 

84.  COMPETITION.     Competition  is  assumed  to  exist,  for,  with- 


ELEMENTS  OF  ECONOMICS  137 

out  it  there  is  a  monopoly.  There  are  two  kinds  of  competition,  mar- 
ket and  industrial.  Market  competition  is  the  competition  among 
buyers  and  sellers  of  the  same  commodity,  including  not  only  mer- 
chants and  consumers,  but  manufacturers,  who  also  buy  and  sell. 
There  is  only  one  condition  of  true  competition,  and  that  is  when  there 
are  several  buyers  and  several  sellers.  If  there  is  one  seller  and 
several  buyers,  or  one  buyer  and  several  sellers,  or  one  buyer  and 
one  seller,  there  is  a  monopoly,  and  true  competition  does  not  exist. 

Industrial  competition  is  competition  among  industries  by  which 
profits  in  different  lines  of  business  tend  to  be  uniform.  This  com- 
petition has  two  phases,  one  being  th-e  competition  among  different 
industries  to  sell  their  products.  This  is  similar  to  market  competi- 
tion, especially  when  the  different  lines  of  business  are  producing 
commodities  that  may  be  used  for  the  same  purpose,  as  gas  or  elec- 
tricity. There  is  anoth-er  variety  of  competition  between  companies 
producing  commodities  that  do  not  serve  the  same  purposes  but  the 
demand  for  which  is  elastic.  The  buyer  has  a  certain  amount  to 
spend,  and  each  industry  is  trying  to  sell  him  as  much  of  its  products 
as  it  can,  and  this  tends  to  lower  prices  in  proportion  to  the  severity 
of  the  competition.  Industrial  competition  has  a  second  phase,  pro- 
duced by  capital  flowing  from  one  industry  into  another.  If  profits 
tend  to  be  especially  low  in  any  industry,  new  capital  ceases  to  flow 
into  it  and  some  capital  may  withdraw,  Leaving  a  larger  field  for 
the  capital  that  remains.  If  profits  are  unusually  high  in  any  indus- 
try, new  capital  flows  into  that  industry  and  market  competition  in 
that  line  of  business  becomes  more  severe,  resulting  in  lower  prices, 
smaller  sales  for  each  firm,  and  lower  profits.  Thus  industrial  com- 
petition and  market  competition,  while  distinct  in  a  way  are  never- 
theless closely  associated. 

85.  DEMAND  AND  SUPPLY.  Demand  means  desire  coupled 
with  ability  to  pay.  Supply  may  mean  that  which  is  offered  for  sale, 
or  it  may  include  the  portion  temporarily  withheld  from  the  market, 
or  it  may  include  the  supply  of  the  near  future.    The  amount  actually 


138  ELEMENTS   OF   ECONOMICS 

offered  for  sale  most  powerfully  affects  the  price,  because  both 
tbuyer  and  seller  are  more  fully  aware  of  the  relation  between  the 
amount  offered  for  sale  and  the  amount  the  consumers  demand.  The 
portion  withheld  from  the  market  will  influence  the  price  only  in  so 
far  as  the  business  world  is  aware  of  its  existence  and  of  the  likeli- 
liood  of  its  being  thrown  upon  the  market.  The  supply  of  the  near 
future  also  exerts  its  influence  upon  price.  This  is  illustrated  every 
year  by  the  fluctuations  of  the  prices  of  farm  products  with  the  vary- 
ing prospects  of  the  growing  crops. 

A  change  in  the  supply,  demand  remaining  the  same,  results  in  a 
change  in  price  because  marginal  utility  is  affected  and  because 
<jompetition  forces  the  price  up  or  down  with  the  rise  or  fall  of  mar- 
ginal utility.  If,  for  example,  there  is  an  extra  large  wheat  crop 
the  price  falls  because  dealers  understand  the  law  of  demand,  back  of 
which  lie  the  laws  of  variation  of  utility  and  the  law  of  satiety,  hence 
they  realize  that  in  order  to  dispose  of  the  whole  supply  the  price 
must  be  lowered  to  tempt  people  to  consume  more  wheat.  Com- 
petition hastens  the  falling  price,  because  each  dealer  fears  that  if 
he  does  not  lower  his  price  others  will  and  he  will  lose  his  trade.  An 
unusually  small  crop  sends  the  price  up  because  of  a  rise  in  the  mar- 
ginal utility;  and  dealers  knowing  this  take  advantage  of  the  situa- 
tion and  raise  their  price.  In  this  case  the  one  who  holds  a  portion 
of  the  supply  for  a  future  rise  in  price  runs  no  risk  of  not  being  able 
to  dispose  of  his  stock,  since  the  wants  of  the  people  will  not  be  sat' 
isfied  and  demand  will  be  strong.  A  change  in  demand  may  come 
from  changes  in  wealth,  in  tastes,  or  in  custom.  The  frequent  and 
often  senseless  changes  in  styles  of  clothing  will  cause  the  price  of 
articles  out  of  style  to  fall,  whether  the  amount  of  such  goods  on 
hand  is  large  or  small.  In  any  case,  changes  in  demand  or  supply 
are  closely  associated  with  changes  in  marginal  utility,  hence,  mar- 
ginal utility  is  practically  the  same  force  as  the  relation  between 
demand  and  supply.  We  may  say,  therefore,  that  prices  vary  di- 
rectly with  marginal  utility. 


ELEMENTS   OF   ECONOMICS  13^ 

86.  COST  OF  PRODUCTION.  By  the  cost  of  production  is 
meant  the  outlay  in  terms  of  money  for  wages  and  other  expenses 
and  the  amount  of  capital  involved,  upon  which  interest  is  to  be  reck- 
oned. From  the  broad  point  of  view  of  social  justice,  cost  should  in- 
clude the  sacrifices  of  labor  and  capitalist,  the  most  burdensome 
work  receiving  the  highest  reward,  and  prices  ranging  accordingly. 
But  for  reasons  which  we  shall  see  later,  competition  either  among 
laborers  or  among  capitalists  is  not  free  and  hence  prices  bear  no  re- 
lation to  sacrifices  in  the  different  industries. 

A  change  in  cost  affects  prices  because  of  the  effects  on  profits. 
If,  for  example,  a  cheaper  process  of  making  shoes  were  invented, 
greater  profits  would  result  if  the  shoes  sold  at  th-e  same  price.  But 
competition  forces  prices  down.  Prices  may  be  maintained  at  their 
former  level  until  the  higher  profits  of  the  industry  attract  new 
capital,  when  increased  competition  will  force  prices  down  roughly 
in  proportion  to  the  fall  in  cost.  Ordinarily,  however,  if  monopolistic 
conditions  do  not  prevail,  competition  among  producers  already  in 
the  industry  is  sufficient  to  bring  down  prices.  The  laws  of  con- 
sumption are  here  at  work  also,  and  the  producer  who  fails  to  lower 
his  prices  will  lose  in  trade  because  the  demand  will  be  supplied  by 
those  who  sell  at  a  lower  price.  The  law  of  diminishing  utility  and  of 
satiety  are  here  plainly  visible. 

What  cost  governs  prices,  highest,  lowest  or  average  cost? 
From  previous  discussions  it  will  readily  be  seen  that  different  por- 
tions of  the  supply  are  produced  at  different  costs.  In  agriculture 
this  is  strikingly  true  because  land  differs  greatly  in  fertility  and 
nearness  to  market.  In  other  lines  of  business  it  is  also  true  be- 
cause of  differences  in  managing  ability  and  in  the  size  of  business 
establishments.  It  is  generally  considered  that  highest  or  marginal 
cost  governs  prices,  because  the  price  must  be  hi^h  enough  to  cover 
expenses  and  to  leave  a  sufficient  reward  to  capital,  otherwise 
capital  would  not  remain  in  the  industry.  Competition  will  keep 
prices  low  enough  to  yield  ordinary  profits  under  the  most  advan- 


140  ELEMENTS  OF  ECONOMICS 

tageous  conditions.  Occasionally,  prices  will  go  lower  than  that  and 
some  marginal  producers  are  forced  out  of  business.  But  on  the 
whole,  competition  will  cease  when  prices  are  at  a  point  that  yields 
ordinary  returns  on  capital  at  the  margin  of  production,  because 
men  will  not  remain  in  business  unless  they  get  about  the  prevailing 
rate  of  loan  interest. 

In  conclusion  we  may  state  the  general  law  of  value  thus:  Value 
is  governed  by  marginal  utility,  marginal  cost,  and  competition, 
with  the  laws  of  consumption  as  underlying  forces;  marginal  utility 
being  the  force  that  causes  temporary  fluctuations  of  prices  above 
or  below  those  which  marginal  cost  would  establish  as  the  normal  or 
permanent  prices. 


ELEMENTS  OF  ECONOMICS  141 


CHAPTER  X. 
Money  and  Credit. 

87.  FUNCTIONS  OF  MONEY.  Money  facilitates  exchanges  and 
thereby  aids  production,  since  it  makes  possible  extensive  subdivision 
of  labor.  The  difficulties  of  barter,  where  there  is  no  money  and  no 
conception  of  money,  may  be  illustrated  by  a  concrete  case.  Suppose 
a  man  has  a  horse  which  he  wishes  to  exchange  for  a  cow.  His  first 
difficulty  would  be  to  find  some  one  who  has  a  cow  to  exchange  for 
a  horse.  This  difficulty  is  called  the  lack  of  coincidence  in  wants, 
and  from  the  nature  of  the  case  is  almost  insurmountable.  The  sec- 
ond difficulty  would  be  to  estimate  the  relative  values  of  tHe  horse 
and  the  cow,  for  without  money  as  a  common  measure  of  value  num- 
erous ratios  must  be  knovm  and  kept  in  mind.  In  the  third  place 
it  would  be  hard  to  "make  change,"  for  the  two  things  would  probably 
not  be  of  equal  value,  and  one  of  the  parties  would  have  to  give  some- 
thing in  exchange. 

Money  greatly  lessens  these  difficulties  by  serving  as  a  common 
measure  or  standard  of  value  and  as  a  medium  of  exchange.  In  the 
above  illustration,  the  man  with  the  horse  would  need  only  to  find 
some  one  who  wished  a  horse  and  with  the  money  secured  he  could 
then  find  some  one  who  had  a  cow  for  sale,  which  would  be  a  much 
easier  task  then  to  find  a  man  with  a  cow  to  exchange  for  a  horse. 
But  with  the  use  of  money  well  established,  buying  and  selling  is 
usually  a  much  simpler  affair,  since  there  are  regular  markets,  with 
prices  approximately  known  to  all.  In  the  case  of  commodities  having 
only  a  local  market  there  are  elements  of  barter,  with  some  of  its 
attendant  difficulties;  but  producers  of  staple  articles  have  little 
trouble  in  selling  them  and  buying  what  they  want,  except  in  times 
of  industrial  depression.  Thus,  money,  being  a  common  measure  of 
value  and  a  medium  of  exchange  lessens  two  of  the  difficulties  of 
barter.  If  the  money  is  made  of  a  material  that  can  be  divided  into 
fractional  parts  without  destroying  the  value  it  will  obviate  the  third 


142  ELEMENTS  OF  ECONOMICS 

difficulty  of  barter,  that  of  making  change. 

Money  performs  a  third  function,  which  is  very  important  in 
modern  industry,  by  serving  as  a  standard  of  deferred  payments.  A 
vast  amount  of  business  is  done  on  credit,  much  of  it  on  long-term 
credit,  and  it  is  quite  necessary  to  have  a  well  known  standard  in 
which  all  debts  can  be  reckoned  and  paid. 

88.  CHARACTERISTICS  NEEDED  IN  MONEY.,  In  order  that 
any  commodity  may  serve  as  money  two  qualities  or  characteristics 
are  indispensable,  it  must  be  universally  acceptable  and  stable  in 
value.  As  a  rule  a  commodity  would  not  acquire  the  first  character- 
istic unless  it  were  fairly  stable  in  value,  at  least  for  short  periods. 
But  to  serve  as  a  standard  of  deferred  payments  it  should  be  stable 
over  long  periods.  To  serve  most  satisfactorily  the  purposes  of 
money  several  other  qualities  are  needed,  but  anything  that  possesses 
these  two  qualities  may  serve  as  money.  In  earlier  ages  sheep,  cat- 
tle, or  other  animals  were  used  as  money,  though  lacking  several 
qualities  needed,  such  as  portability  and  divisibility.  The  two  pri- 
mary qualities  needed  in  money  are,  therefore,  universal  acceptability 
and  stability  of  value. 

Several  other  qualities  are  needed  in  money.  It  ought  to  be  dur- 
able, easily  distinguishable,  divisible,  and  portable.  To  enable  one  to 
tell  at  a  glance  the  value  of  a  piece  of  money,  coinage  has  developed. 
At  first  the  coins  were  crude  in  workmanship  and  easily  clipped  and 
plugged  without  being  detected.  But  a  modern  coin  enables  one  to 
know  at  sight  the  weight  and  fineness,  hence  the  value.  Old  coins 
become  worn  and  are  not  of  full  weight,  but  they  are  made  legal 
tender  and  when  badly  worn  are  recoined,  so  that  in  most  countries 
today  coins  circulate  freely  at  their  face  value.  To  prevent 
clipping,  the  edges  are  milled.  By  having  coins  of  different  denom- 
inations it  is  easy  to  make  change. 

Another  quality  needed  in  a  circulating  medium  is  elasticity  in 
quantity.  In  earlier  ages  when  production  was  chiefly  local  and  on  a 
small  scale,  demand  for  money  was  fairly  constant,  but  in  modern 


ELEMENTS  OF  ECONOMICS  143: 

industry  demand  for  money  increases  during  certain  seasons  of  the 
year  and  during  "good  times^."  In  order  to  meet  this  seasonal  and 
periodic  increase  and  decrease  in  demand  the  volume  of  the  cur- 
rency should  expand  and  contract.  If  the  volume  of  currency  does 
not  increase  with  the  increase  in  demand,  industry  is  handicapped, 
and  if  the  currency  does  not  contract  with  the  decrease  in  business,, 
the  increase  in  the  currency  year  after  year  and  period  after  period, 
would  in  time  destroy  the  value  of  money. 

89.  MATERIALS  NEEDED  FOR  MONEY.  Centuries  of  ex^ 
perience  has  shown  that  several  kinds  of  material  are  needed  for 
money.  For  small  change  the  cheaper  metals  are  best,  copper  for  the 
smallest  denomination  and  nickel  for  the  five-cent  pieces  and  silver 
for  the  ten-cent,  twenty-five-cent,  and  fifty-cent  pieces.  Gold  would 
not  do  at  all  for  this  fractional  currency,  because  the  pieces  would 
be  too  small,  and  experience  has  shown  that  gold  is  not  suitable  for 
anything  under  the  five-dollar  piece.  Nor  would  paper  be  suitable 
for  fractional  currency,  as  was  demonstrated  during  the  Civil  War. 

Silver  is  also  used  for  the  dollar-piece,  but  paper  is  more  con- 
venient, as  was  shown  when  our  government  attempted  to  circulate 
large  quantities  of  silver  under  the  Bland-Allison  Act  of  1878.  Only 
about  sixty  million  dollars  would  stay  in  circulation,  the  remainder 
finding  its  way  into  the  banks  and  the  government  treasury.  Wh-en 
silver  certificates  were  issued  a  few  years  later  in  denominations  of 
one,  two,  and  five  dollars,  they  remained  in  circulation.  Experience 
shows,  therefore,  that  for  large  change  as  it  is  called,  that  is,  de- 
nominations of  one,  two,  five,  and  ten  dollars,  for  use  in  retail  trade 
paper  currency  is  more  convenient  than  any  metal.  For  wholesale 
transactions  bank  checks  are  the  most  convenient  of  any  form  of 
■currency,  being  safe  and  easily  made  out  for  any  amount.  To  meet 
the  need  for  paper  currency  we  have  in  the  United  States  as  the 
result  of  a  patch-work  of  legislation  several  kinds  of  paper  cur- 
rency, including  the  United  States  notes,  popularly  called  Green- 
backs, issued  during  the  Civil  War,  Treasury  notes   (Act  of  1890) ^ 


144  ELEMENTS  OF  ECONOMICS 

national -bank  notes,  Federal  Reserve  notes  (Act  of  1918),  gold  and 
silver  certificates,  and  checks. 

Back  of  all  this  paper  currency  must  be  a  certain  amount  of 
standard  money  in  order  to  keep  the  value  of  the  paper  from  falling 
below  the  value  of  gold.  Centuries  of  experience  has  shown  that 
unless  the  authority  issuing  paper  currency  provides  for  its  re- 
demption on  demand  in  the  standard  money  of  the  world,  the  paper 
will  depreciate.  Hence,  stated  briefly,  the  business  world  needs 
copper,  nickel,  and  silver  for  fractional  coins,  paper  for  larger  de- 
nominations, and  gold  as  reserves  to  keep  the  paper  from  depreciat- 
ing in  value. 

90.  CREDIT  CURRENCY.  Besides  common  book  credit,  which 
is  incidental  to  ^barter  and  to  the  custom  of  paying  bills  a  month  af- 
ter goods  are  purchased,  there  are  five  forms  of  credit  instruments, 
A  credit  instrument  is  both  a  substitute  for  money  and  a  promise  to 
pay  money  on  demand  or  in  the  future.  It  circulates  as  money  only 
because  the  public  believes  the  one  making  the  promise  to  pay  money 
will  do  so  if  the  money  is  really  needed. 

The  most  important  credit  instrument  is  the  bank  check.  A 
check  is  the  order  of  one  person  for.  the  bank  to  pay  to  another  per- 
son a  certain  sum  of  money,  usually  on  demand.  The  check  is  not 
considered  as  money  by  the  business  world,  because  it  does  not  cir- 
culate freely  as  the  bank  note  does.  The  check  is  not  a  promise  of 
the  bank  to  pay,  except  on  the  condition  that  the  drawer  has  money 
on  deposit,  hence  the  person  receiving  a  check  has  no  assurance  that 
it  will  be  cashed  by  the  bank,  except  the  honor  of  the  one  drawing 
the  check.  Also  a  check  passes  only  on  endorsement.  For  these 
reasons  checks  are  usually  presented  to  the  bank  by  the  payee  im- 
mediately or  within  a  few  days  after  they  are  issued.  Though  not 
considered  as  money  checks  do  the  work  of  money.  The  individual 
check  may  be  restored  to  the  bank  and  be  cancelled  within  a  few 
hours  after  it  is  issued,  and  thus  cease  to  circulate,  but  in  most  cases 
actual  cash  is  not  received  for  it,  but  instead  credit  on  the  books  of  the 


ELEMENTS  OF  ECONOMICS  145 

bank  is  given  to  the  payee,  and  checks  are  drawn  against  it.  Thus 
the  volume  of  check  currency,  or  deposit  currency,  as  it  is  called,  is 
maintained  and  checks  serve  as  a  circulating  medium.  For  whole- 
sale trade  the  check  is  the  most  convenient  form  of  currency  yet  de- 
vised. If,  for  example,  a  person  wished  to  pay  a  sum  of  $1253.24  it 
would  be  much  easier  to  write  out  a  check  for  that  amount  than  to 
count  out  the  money,  and  the  check  is  much  safer  to  carry  around. 
For  retail  trade,  however,  the  ch-eck  is  not  convenient,  except  for 
paying  bills  at  the  end  of  the  month,  because  most  people  would  not 
be  sufficiently  well  known  by  retail  dealers,  and  people  do  not  wish 
to  bother  with  checks  for  small  amounts. 

Bank  notes  are  considered  as  money  by  everybody,  because  they 
circulate  freely  without  endorsement.  They  are  the  promises  of  the 
bank  to  pay,  and  banks  are  well  known  institutions,  supervised  by 
the  government,  hence  their  promises  to  pay  money  are  as  good  as 
money.  Being  universally  acceptable  and  in  denominations  suitable 
for  small  transactions,  the  bank  note  is  especially  convenient  for  the 
retail  trade,  and  for  paying  laborers.  The  custom  of  paying  laborers 
by  check  is  growing,  however,  and  in  time  may  become  universal. 
Bank  notes  are  not  as  good  as  checks  for  the  wholesale  trade,  for 
they  are  not  safe,  though  they  might  be  fairly  convenient  by  being 
made  in  large  denominations.  The  danger  of  carrying  large  sums 
of  money  is  so  great  that  checks  are  used  almost  exclusively  in 
wholesale  transactions. 

A  third  instrument  of  credit  is  the  draft  or  bill  of  exchange.  A 
bank  draft  is  an  order  of  a  bank  for  another  bank  to  pay  a  third  party 
a  certain  sum  of  money.  Drafts  are  used  in  paying  debts  due  outside 
the  immediate  neighborhood,  that  is,  in  other  cities  or  foreign  coun- 
tries. They  are  substitutes  for  money  in  making  such  payments, 
though  they  do  not  circulate  as  money.  In  foreign  trade  or  in  small 
transactions  between  persons  of  different  parts  of  the  country,  the 
draft  is  very  convenient,  because  it  is  safer  than  money,  it  is  cheaper 
to  send,  and  also  saves  the  use  of  real  money.    By  the  use  of  drafts, 


146  ELEMENTS  OF  ECONOMICS 

hundreds  of  millions  of  dollars  worth  of  goods  are  annually  ex- 
changed without  the  use  of  money,  except  a  certain  per  cent  for- 
bank  reserves.  Suppose  a  New  York  merchant  has  ordered  goods 
from  London.  Instead  of  sending  gold,  upon  which  he  would  pay  ex- 
press charges  and  insurance,  he  gets  from  his  bank,  by  paying  cash  or 
by  giving  his  personal  note,  or  some  other  form  of  commercial  paper, 
a  draft  in  favor  of  the  London  merchant.  Hundreds  of  other  New 
York  merchants  as  well  as  merchants  in  other  large  cities  are  also 
paying  debts  by  drafts  on  London.  In  London  merchants  who  have 
purchased  goods  from  America  are  sending  drafts  to  their  creditor's. 
Thus  the  New  York  banks  are  receiving  money,  or  commercial  paper, 
for  drafts  on  London  and  are  paying  out  money  for  or  receiving  on 
deposit,  drafts  on  New  York  from  London.  In  case  New  York  mer- 
chants and  London  merchants  import  equal  amounts,  accounts  would 
balance  and  no  money  would  be  sent  either  way.  But  in  case  New 
York  imported  more  goods  than  it  exported,  the  balance  must  be 
sent  in  gold,  if  such  a  condition  remains  permanent  or  even  lasts  for 
several  months.  America  is  said  to  have  an  unfavorable  balance  of 
trade,  and  the  amount  paid  for  drafts,  called  the  rate  of  exchange, 
rises,  because  the  American  banker  must  ship  to  the  London  banker 
the  gold  which  the  London  banker  is  ordered  to  pay  to  London  mer- 
chants. 

A  new  form  of  credit  instrument  has  recently  been  devised,  known 
as  the  traveler's  check.  This  is  much  like  the  draft,  except  that  the 
one  who  gets  the  draft  from  the  bank  is  also  the  payee,  and  the  sig- 
natures of  the  bank  officials  and  of  the  payee  are  on  the  traveler's; 
check.  The  advantages  of  the  traveler's  check  are  that  it  is  safe,, 
since  no  one  can  cash  it  except  the  payee,  and  identification  is  pro- 
vided for  by  having  the  payee  sign  the  check  when  made  out  and 
again  when  collected. 

A  fifth  form  of  credit  is  the  personal  promisory  note.  The 
promisory  note  takes  the  place  of  money  only  to  a  very  limited  ex- 
tent, since  only  the  individual  and  not  a  bank  stands  back  of  the 


ELEMENTS  OF  ECONOMICS  147 

note.  Th-e  main  use  of  the  personal  note  is  to  obtain  the  various 
forms  of  bank  credit,  the  bank  exchanging  its  credit  for  the  credit  of 
the  individual.  Hence,  personal  notes  are  the  pledges  upon  which 
bank  credit  is  largely  based. 

91.  CHANGES  IN  THE  VALUE  OF  MONEY.  PRICE  TABLES. 
The  value  of  money,  that  is,  its  general  purchasing  power,  changes 
greatly  from  time  to  time,  and  such  changes  vitally  affect  the  welfare 
of  different  classes  of  people,  especially  debtors,  creditors,  wage 
earners,  and  all  persons  receiving  a  stipulated  annuity.  If  the  value 
of  money  falls,  debtors  are  benefited,  if  they  belong  to  the  producing 
classes,  since  higher  prices  would  give  a  larger  money  income  while 
the  debt  would  not  increase.  Creditors,  on  the  other  hand,  would  be 
injured.  If  the  value  of  money  falls,  that  is,  if  prices  rise,  laborers 
are  for  a  time  injured,  since  the  rise  in  wages  always  lags  behind  a 
rise  in  prices.  In  order  to  judge  of  the  importance  to  society  of 
changes  in  value  of  money  we  must  know  how  to  estimate  the  amount 
of  the  changes. 

Changes  in  the  value  of  money,  that  is,  changes  in  the  general 
level  of  prices,  are  estimated  by  the  device  known  as  price  tables. 
Suppose  we  wish  to  know  how  much  the  general  level  of  prices  has 
risen  during  the  last  ten  years.  We  select  a  number  of  important 
commodities,  say  twenty  or  more,  and  ascertain  the  price  of  each 
now  and  ten  years  ago.  The  price  of  each  commodity  ten  years  ago 
is  taken  as  the  basis  from  which  to  reckon,  and  called  100  per  cent. 
Then  the  present  price  of  each  article  is  compared  with  the  price 
ten  years  ago  and  the  percentage  of  the  rise  or  fall  of  each  commodity 
is  determined.  Then  the  average  rise  is  found  of  articles  whose 
prices  have  risen,  and  the  average  fall  of  those  whose  prices  have 
fallen,  and  the  difference  between  these  two  averages  gives  us  the 
general  average  rise  or  fall  of  all  articles  in  the  table. 

The  practical  value  of  a  price  table  depends  upon  the  number  and 
kinds  of  commodities  selected.  The  ideal  table  would  contain  all  com- 
modities on  the  market  and  each  would  be  given  weight  in  our  table 


148  ELEMENTS  OF  ECONOMICS 

in  proportion  to  the  amount  consumed.  Practically,  such  a  tabl-e 
is  impossible,  and  we  must  therefore  choose  a  sufficient  number  of 
important  things.  If,  for  example,  flour  has  risen  ten  per  cent  and 
salt  has  fallen  twenty  per  cent,  this  would  indicate  a  fall  in  prices. 
But  such  a  conclusion  is  absurd,  for  obvious  reasons.  Different  tables 
would  show  different  results.  If  we  wished  to  know  whether  the 
cost  of  living  for  working  men  has  risen  or  fallen  and  how  much, 
we  should  include  in  our  table  only  such  articles  as  are  ordinarily 
consumed  by  the  working  classes,  and  these  should  be  weighted 
as  it  is  called.  That  is,  if  three  times  as  much  money  is  spent  upon 
one  thing  as  upon  another,  the  percentage  of  rise  or  fall  of  the 
more  important  article  should  be  multiplied  by  three  before  an  aver- 
age is  obtained.  When  price  tables  are  properly  made  up  they  are 
of  great  value  in  helping  to  solve  many  social  problems.  Minimum 
wage  boards,  for  example,  must  use  the  knowledge  obtained  from 
such  tables  in  reaching  any  just  conclusion  as  to  the  proper  rise  in 
wages  as  the  cost  of  living  advances. 

92.  CAUSES  OF  CHANGES  IN  THE  VALUE  OF  MONEY.  The 
value  of  money  is  a  ratio  between  gold  and  goods,  since  the  value 
of  anything  is  measured  by  its  power  in  -exchange;  and  since  the 
purchasing  power  of  money  is  determined  by  its  power  in  exchange 
for  all  kinds  of  goods,  the  value  of  money  and  the  general  level  of 
prices  are  convertible  terms.  The  value  of  money  being  a  ratio,  any- 
thing that  affects  either  side  of  the  ratio  affects  the  value  of  money. 
The  forces  affecting  the  value  of  money,  th-erefore,  would  include 
all  the  forces  that  might  affect  either  gold  or  goods.  Theoretically, 
there  are  tw-elve  such  forces,  namely,  increase  or  decrease  of  de- 
mand, supply,  or  cost  of  either  goods  or  gold.  From  this  it  will  be 
observed  that  the  investigation  of  the  causes  of  changes  in  prices 
is  a  very  complex  affair,  not  so  easily  disposed  of  as  arguments  of 
politicians  on  monetary  problems  would  sometimes  imply.  During 
the  period  of  falling  prices  from  1865  to  1896  one  group  of  politicians 
based  their  arguments  for  an  increase  in  money  upon  the  assump- 


ELEMENTS  OF  ECONOMICS  149 

tion  that  all  the  causes  of  the  fall  in  prices  came  from  the  money 
side  of  the  ratio;  but  competent  students  of  that  period  agree  that 
the  chief  causes  of  the  fall  came  from  the  goods  side  of  the  ratio, 
especially  a  decrease  in  the  cost  of  production.  We  have  already 
considered  the  forces  affecting  the  value  of  goods,  and,  remember- 
ing that  any  force  which  changes  the  value  of  goods  changes  the 
general  price  level,  we  may  proceed  to  the  consideration  of  the  forces 
coming  from  the  money  side  of  the  ratio. 

We  have  seen  that  the  law  of  satiety  plays  a  vital  part  in  de- 
termining the  value  of  goods.  If,  for  example,  there  is  a  large  com 
crop,  producers  and  dealers  voluntarily  lower  their  prices,  know- 
ing that  they  must  do  so,  or,  as  a  result  of  the  law  of  satiety,  rivals 
will  lower  prices  and  supply  the  market,  leaving  those  who  fail  to 
lower  prices  with  their  corn  on  their  hands  which  they  cannot  sell 
at  all  or  only  at  greatly  reduced  prices.  But  gold  or  any  other  com- 
modity used  as  money  is  not  subj-ect  to  the  law  of  satiety,  because 
it  does  not  satisfy  one  want  only  but  is  a  means  of  satisfying  all 
wants.  This  may  appear  inconsistent  with  the  principle  that  for  the 
individual,  money,  representing  general  wealth,  may  be  subject  to 
the  law  of  variation  of  utility,  since  the  richer  one  gets  the  less 
he  may  care  for  additional  wealth.  Society,  however,  is  not  com- 
posed exclusively  of  such  individuals  but  chiefly  of  those  struggling 
to  increase  their  fortunes;  and  it  remains  true  that  for  society  as  a 
whole  money  does  not  obey  the  law  of  satiety.  Hence  it  follows 
that  producers  of  gold  would  not  voluntarily  offer  more  of  it  in  ex- 
change for  goods,  either  in  case  of  an  increased  supply  or  lower 
cost,  because  no  producer  would  have  any  fears  about  having  gold 
left  on  his  hands  which  he  could  not  dispose  of  at  the  accustomed 
rate.  Nor  would  dealers  in  goods  take  into  account  the  lower  cost 
of  gold  nor  the  increase  in  the  amount  produced.  The  business  world 
thinks  of  money  as  something  which  in  itself  does  not  change  in 
value,  or  only  so  slowly  that  no  attention  need  be  paid  to  it  in  busi- 
ness transactions.     And  the  belief  that  the  value  of  money  changes 


150  ELEMENTS  OF  ECONOMICS 

slowly  is  true,  as  shown  by  experience,  and  this  fact  would  show  that 
changes  in  quantity  or  cost  of  gold  do  not  affect  its  value  in  the  same 
manner  as  changes  in  supply  or  cost  affect  the  value  of  anything 
else.  Any  material  change  in  the  cost  or  prospective  supply  of  an 
ordinary  commodity  is  immediately  known  by  the  business  world 
and  prices  would  change  within  a  few  hours. 

But  it  is  known  and  acknowledged  by  all  that  a  fall  in  the  cost 
of  producing  gold  results  in  a  rise  of  prices,  or  a  fall  in  the  value 
of  gold,  whichever  way  one  chooses  to  look  at  it.  The  explana- 
tion generally  accepted  by  economists  is  that  the  lower  cost  of 
producing  gold  results  in  an  increase  in  its  quantity  and  that  this 
results  in  an  increased  demand  for  goods.  Producers  and  dealers 
observe  the  increased  demand  for  goods  and  raise  the  prices  of 
their  goods.  Not  all  goods  would  at  once  begin  to  rise,  but  only 
such  as  miners  would  use  in  increased  quantities.  Gradually,  how- 
ever, increase  in  demand  would  reach  other  goods,  and  prices  gen- 
erally would  rise.  In  case  the  law  of  diminishing  returns  applies, 
the  increased  production  of  goods  that  would  follow  the  increased 
demand  would  increase  the  marginal  cost,  and  prices  would  remain 
permanently  higher.  The  increase  in  prices  would  lessen  the  profits 
of  mine  owners  and  production  at  the  poorer  or  marginal  mines  would 
be  checked  until  they  paid  the  ordinary  rate  of  profits,  and  thus 
equilibrium  between  the  cost  of  goods  and  the  cost  of  gold  would 
be  established  and  these  new  costs  would  permanently  determine 
the  new  price  level. 

In  case  it  should  become  known  that  gold  would  soon  become 
as  plentiful,  say,  as  iron,  the  valuation  process  woirid  be  different 
from  that  described  above.  In  such  a  case  the  value  of  gold  would 
drop  immediately  and  prices,  reckoned  in  gold,  would  consequently 
rise  at  once.  But  so  long  as  no  such  revolutionary  change  is 
expected,  men  go  about  their  business  as  though  there  were  no 
such  thing  as  a  change  in  the  marginal  cost  of  gold  or  an  increase 
in  its  quantity. 


ELEMENTS  OF  ECONOMICS  151 

93.  THE  EFFECTS  OF  CREDIT  ON  PRICES.  The  effects  of 
credit  on  prices  are  matters  of  controversy  among  economists,  but 
the  view  herein  presented  seems  to  be  the  one  gaining  ground.  The 
temporary  increase  in  credit  will  raise  prices,  if  the  increase  is  rapid, 
because  of  the  increased  demand  for  goods.  An  increase  in  credit 
is  due  to  the  expansion  of  business,  which  means  that  men  are  buy- 
ing more  goods  than  usual'.  The  effects  of  a  sudden  increase  in 
credit  are  seen  most  clearly  when  business  revives  after  a  period  of 
industrial  depression.  When  business  begins  to  revive,  factories  that 
have  been  idle  or  running  on  short  time  are  run  to  their  full  capacity, 
and  more  materials  are  needed.  The  price  of  iron,  which  is  so  ex- 
tensively used  in  modern  industry,  often  rises  20  or  30  per  cent  in 
A  few  weeks  during  a  "boom"  period. 

Permanently,  however,  the  increase  in  credit  does  not  raise  prices. 
The  increase  in  credit  not  only  means  an  increase  in  the  demand  for 
goods,  but  it  also  causes  an  increased  production  of  goods.  The 
factories  that  suddenly  start  up  soon  begin  to  turn  out  an  increased 
quantity  of  goods  to  meet  the  new  demand.  The  only  reason  why 
prices  rise  with  the  increase  in  credit  is  because  demand  for  goods 
temporarily  runs  ahead  of  the  supply.  Consequently,  if  the  increase 
in  credit  were  gradual  and  evenly  spread  over  all  industries  there 
would  be  no  increase  in  prices,  -even  temporarily,  because  demand 
and  supply  would  be  equalized  all  around.  It  would  be  like  a  gen- 
eral increase  in  barter,  which  certainly  would  not  raise  prices.  For 
similar  reasons  a  sudden  increase  of  credit  in  certain  industries 
sets  in  motion  the  productive  force  of  the  country  and  the  initial 
increase  in  demand  for  goods  is  met  by  an  increased  supply,  which 
brings  prices  down  to  their  normal  level. 

Indirectly,  the  gradual  increase  of  credit  as  a  substitute  for 
money  prevents  prices  from  falling.  Suppose  during  the  next  twenty 
years  the  volume  of  the  world's  business  should  double,  and  that  the 
volume  of  money  and  credit  or  the  rapidity  of  circulation  should  not 
increase.     The  result  would  be  the  fall  in  prices  or  the  rise  in  the 


152  ELEMENTS   OF  ECONOMICS 

value  in  gold,  because  of  the  increased  demand  for  gold.  The  situa- 
tion would  be  similar  to  that  of  Europe  during  the  Middle  Ages. 
During  the  Dark  Ages  the  gold  and  silver  mines  of  the  world  were^ 
closed  and  the  supply  of  the  precious  metals  ran  very  low.  With 
the  increased  volume  of  commercial  transactions  during  the  Middle 
Ages  prices  went  down  so  low  that  they  seem  to  us  ridiculous.  In 
1050,  a  cow  sold  for  about  $1.50,  a  sheep  for  30  cents,  a  hog  for  50 
cents,  and  wheat  for  five  cents  a  bushel.  If,  however,  the  increase 
in  business  were  accompanied  by  an  increase  in  credit,  no  increased 
demand  for  gold  would  result,  and  prices,  instead  of  falling,  would 
remain  the  same.  Briefly  we  may  summarize  the  results  of  an  in- 
crease in  credit.  A  sudden  increase  in  credit  will  increase  prices 
temporarily  because  demand  for  goods  runs  ahead  of  the- supply; 
but  increased  production  soon  brings  prices  down  to  their  normal 
level,  so  that  over  long  periods  of  time  an  increase  in  credit  doe& 
not  raise  prices;  the  negative  permanent  affect  of  an  increase  in 
credit  is  to  keep  prices  from  falling  by  preventing  an  increased  de- 
mand for  gold. 

94.  LAW  OF  VALUE  OF  MONEY.  We  may  now  summarize  the 
results  of  the  last  two  sections  and  state  the  general  law  of  the 
value  of  money.  The  value  of  money  depends  upon  the  relative 
marginal  costs  of  producing  gold  and  goods  and  upon  the  demand 
and  supply  both  of  gold  and  of  goods,  marginal  costs  being  the 
permanent  forces;  credit  directly  affects  prices  only  temporarily, 
the  only,  permanent  effect  being  negative,  that  is,  to  keep  prices 
from  falling. 

It  is  usually  laid  down  as  a  law  by  the  older  economists  that, 
other  things  remaining  the  same,  the  rise  in  prices  is  in  propor- 
tion to  the  increase  in  money,  and  many  modern  economists  hold 
the  same  view.  Thus,  as  a  recent  writer  says,  "Double  the  quantity 
of  money,  and,  other  things  being  equal,  prices  will  be  twice  as  high 
as  before  and  the  value  of  money  one  half."  In  explanation  of  this 
phenomenon  he  says,  "The  demand  for  money,  in  any  given  com- 


ELEMENTS  OF  ECONOMICS  15S 

munity  at  any  given  time,  is  constant.  It  is  not  subject  to  change 
because  of  the  greater  or  less  range  of  prices.  Whether  goods  sell 
for  less  or  more,  all  of  them  will  still  be  sold,  and  will  still 
be  offered  for  money."  In  the  first  place,  the  "other  things'*  referred 
to  will  not  remain  equal,  for  doubling  the  amount  of  money  would 
bring  such  important  changes  that  this  law,  if  true,  has  no  practical 
value.  Rapidity  of  circulation,  among  other  things,  would  not  remain 
the  same.  Moreover,  this  explanation  is  purely  mechanical  and  over- 
looks the  essential  details  of  the  price-making  process.  If  twice, 
as  much  money  should  be  put  into  circulation  there  would  be  twice 
as  great  a  demand  for  goods,  for,  it  is  to  be  observed,  not  only  will 
all  the  goods  be  offered  for  money,  as  this  same  writer  says,  but 
all  the  money  will  be  offered  for  goods,  or  as  he  says,  "It  is  sought 
in  order  to  be  spent."  It  hardly  requires  proof  to  show  that  doubling 
the  demand  for  goods  will  not  result  in  doubling  prices.  If  the  de- 
mand is  for  goods  subject  to  the  law  of  diminishing  returns,  prices 
would  be  much  more  than  doubled.  Doubling  the  amount  of  money 
would  vitally  affect  the  laws  of  production,  and  the  results  would 
be  very  complex,  the  prices  of  some  things  rising  a  great  deal  and 
the  prices  of  others  being  affected  but  little. 

95.  CHANGES  IN  PRICES  SINCE  1870.  From  the  close  of 
the  Civil  War  to  about  1896  the  general  tendency  of  prices  was  down- 
ward, owing  to  various  causes,  chief  among  which  were  ( 1 )  the 
lower  cost  of  production  of  manufactured  goods,  resulting  from  im- 
proved processes,  (2)  the  opening  up  of  new  agricultural  regions, 
(3)  the  lower  cost  of  transportation,  both  by  land  and  sea,  and  (4) 
the  closing  of  the  mints  of  many  countries  to  the  free  coinage  of 
silver.  During  that  period  our  western  plains  were  settled  and  their 
products  thrown  upon  the  market,  and  at  the  same  time  Russia  and 
the  South  American  countries  were  sending  new  supplies  to  the 
European  market.  During  this  period  the  Greenback  party  had  its 
birth,  and  also  the  free-silver  party,  both  movements  being  demands 
for  an  increase  in  the  currency  with  the  hope  of  preventing  the  fall 


154  ELEMENTS  OF  ECONOMICS 

in  prices.  But  in  the  midst  of  the  free-silver  campaign  of  1896 
prices  began  to  rise  and  they  have  been  going  up  ever  since. 

The  extent  of  the  rise  in  prices  between  1896  and  the  outbreak  of 
the  European  War  in  1913  has  been  variously  estimated,  some  price 
tables  showing  a  rise  of  about  45  per  cent,  others  of  more  than  50 
per  cent.  A  price  table  properly  weighted  and  including  only  com- 
modities consumed  by  the  working  classes  would  show  a  rise  of  more 
than  50  per  cent,  possibly  75  per  cent.  The  advance  in  prices  has 
.been  world-wide  and  has  affected  most  commodities,  though  the  rise 
has  been  most  marked  for  agricultural  products  and  certain  "trust" 
made  goods.  Among  the  causes  of  the  great  increase  in  prices,  three 
are  especially  important,  the  increase  in  the  supply  of  gold,  the  law 
of  diminishing  returns  in  agriculture,  and  the  growth  of  monopolies. 

From  the  discovery  of  America  to  1850  the  total  amount  of  gold 
produced  in  the  world  is  estimated  at  $3,314,000,000.  With  the  dis- 
covery of  gold  in  California  and  Australia  in  1849  production  sudden- 
ly increased,  reaching  a  total  of  $3,310,000,000  by  1875,  or  as  much  in 
twenty-five  years  as  during  the  previous  three  hundred  and  fifty- 
eight  years.  During  the  next  twenty-five  years  production  increased 
slightly,  reaching  $3,800,000,000  for  the  period.  Since  1900  the  pro- 
duction of  gold  has  advanced  with  leaps  and  bounds,  the  total  for  the 
years  1901-1914  being  about  $5,500,000,000.  During  the  years 
1907-1914  the  world  has  produced  more  gold  than  during  any  period 
/Of  twenty-five  years  previous  to  1900,  and  the  annual  output  has 
been  three  times  as  great  as  during  the  twenty-five  years  before  that 
date.  Such  an  enormous  increase  in  gold  would  naturally  cause  a 
great  rise  in  prices. 

The  fact  that  agricultural  products  have  increased  in  a  marked 
degree  shows  that  a  second  cause  for  the  rise  in  prices  is  the  law  of 
diminishing  returns.  Th-e  population  of  the  world  has  been  increasing 
rapidly  and  the  free  lands  of  the  New  World  have  been  settled,  and 
consequently  an  increasing  supply  must  come  to  a  considerable  ex- 
tent from  poorer  lands  or  those  more  distant  from  market.     A  third 


ELEMENTS   OF   ECONOMICS  155 

cause  for  the  rise  in  prices  has  been  the  growth  of  monopolies.  An 
increasing  number  of  articles  are  produced  under  monopolistic  con- 
ditions, as  previously  noted. 

The  evils  resulting  from  this  rise  in  prices  are  apparent.  It 
means  that  the  masses  of  the  people  find  it  harder  to  make  a  living. 
The  annuitant  finds  his  dollars  growing  less  and  less  valuable,  with 
no  increase  in  their  number.  The  wage  earner  is  also  suffering.  Ac- 
curate statistics  are  wanting  here,  but  the  most  reliable  authorities 
estimate  that  the  wages  of  skilled  labor,  backed  up  by  strong  unions, 
have  advanced  in  about  the  same  proportion  as  prices;  but  wages  of 
unskilled  labor  have  advanced  little  or  none  at  all,  and  these  un- 
fortunate classes  are  sinking  deeper  into  poverty. 

From  the  nature  of  the  causes  of  the  rise  in  prices,  only  one  can 
directly  be  removed,  namely,  the  growth  of  monopolies,  and  it  seems 
doubtful  if  this  growth  can  be  stopped,  though  monopoly  prices  might 
be  regulated.  Society  as  a  whole  must  confine  itself  to  (1)  seeking 
means  of  offsetting  the  law  of  diminishing  returns,  such  as  scientific 
agriculture  and  a  better  organization  of  marketing,  (2)  devising 
means  of  readjusting  the  distributive  process,  such  as  the  minimum 
wage,  or  adopting  Socialism,  which  the  radicals  desire,  and  (3)  a 
general  elevation  of  the  masses  to  a  higher  plane  of  intelligence, 
that  each  may  be  a  better  producer,  a  more  rational  consumer,  and 
wise  enough  not  to  undertake  the  support  of  a  family  until  he  has  a 
sufficient  income. 

96.  THE  TERRITORIAL  DISTRIBUTION  OF  GOLD.  The  sec- 
ond law  of  money  is  that  gold  flows  to  those  countries  where  its  value 
is  greatest,  or  where  prices  are  lowest.  Suppose  Australia  increases 
her  output  of  gold.  Prices  would  tend  to  rise  in  Australia  above  the 
level  in  other  countries  because  of  the  increased  demand  for  goods. 
The  rise  in  prices  in  Australia  would  cause  an  increase  in  imports, 
since  merchants  would  naturally  buy  where  prices  are  lower.  In 
case  certain  goods  were  not  produced  at  all  in  Australia,  the  increase 
in  gold  would  sii^iply  mean  an  increased  demand  for  imports  and  more 


156  ELEMENTS   OF  ECONOMICS 

goods  would  be  shipped  in  regardless  of  a  rise  in  price,  or  more 
strictly  speaking,  the  rise  in  prices  in  foreign  countries  might  take 
place  before  any  gold  would  be  sent  to  foreign  countries.  This  would 
be  true  because  the  gold  itself  would  not  at  first  be  shipped,  but  the 
goods  would  be  ordered  and  paid  for  by  bank  drafts,  hence  the  actual 
flow  of  gold  would  take  place  after  the  goods  began  to  flow  to  Aus- 
tralia, and  presumably  after  prices  began  to  rise  abroad.  But  it 
would  still  remain  true  that  gold  flows  to  those  countries  wh-ere  it  is 
of  most  value. 

This  law  would  inform  us  that  any  attempt  to  raise  the  prices'  of 
one  country  to  any  great  extent  above  the  world  level  by  increasing 
the  currency  would  be  futile.  Suppose,  for  example,  the  United 
States  should  attempt  to  raise  prices  by  an  increase  in  silver  as  under 
the  Sherman  Act  of  1890,  when  we  were  buying  silver  and  thrusting 
it  into  circulation  at  the  rate  of  about  fifty  millions  of  dollars  a  year. 
The  rise  in  prices  in  this  country  would  increase  imports  over  exports 
and  the  balance  would  be  paid  in  money,  thus  draining  off  our  extra 
supply  of  money.  Each  nation  will  have  its  proportionate  share  of 
the  world's  money,  determined  by  the  volume  of  its  business  and  its 
machinery  of  exchange,  and  any  attempt  of  one  nation  to  attract 
more  than  that  amount  will  be  nullified  by  the  natural  laws  of  trade. 

97.  GRE SHAM'S  LAW.  The  third  law  of  money  is  called  Gresh- 
am's  Law,  from  the  finance  minister  of  Queen  Elizabeth,  who  seems 
to  have  been  the*  first  to  formulate  the  law.  This  law  is  that  bad 
money  drives  out  an  equivalent  amount  of  good  mon-ey.  This  is  real- 
ly a  particular  phase  of  the  law  of  territorial  distribution.  Bad 
money,  in  Gresham's  law,  is  debased  money,  that  is,  money  of  less 
weight  than  that  provided  for  by  law,  worn  coins,  coins  not  worth 
as  bullion  their  face  value  as  coins,  such  as  our  silver  dollars,  and 
paper  money  of  all  kinds,  which  may  be  good  in  the  country  where 
issued  but  do  not  pass  current  in  other  countries. 

There  are  three  ways  by  which  the  bad  money  drives  out  the 
good,  the  melting  pot,  hoarding  of  the  good  money,  and  by  exporting 


ELEMENTS   OF   ECONOMICS  157 

the  good  money.  By  the  first  process,  goldsmiths  pick  out  brand 
new  coins  if  they  wish  to  use  the  gold  in  them.  By  the  second  way, 
those  with  the  good  money,  say  gold,  would  hoard  it  in  case  any 
inflation  of  the  currency  were  anticipated,  hoping  that  when  most 
of  the  gold  is  driven  out  or  hoarded  it  will  command  a  premium, 
since  importers  of  goods  must  pay  in  gold.  The  third  process  comes 
through  the  rise  in  prices  caused  by  the  increase  in  the  currency,  and 
since  the  bad  money  will  not  be  accepted  at  its  face  value  in  foreign 
countries,  the  gold  is  sent  to  pay  balances. 

The  three  laws  of  money  are  very  closely  related,  and  that  rela- 
tionship may  be  shown  thus:  Taking  our  illustration  of  Australia  in- 
creasing her  gold  supply,  the  first  general  result  is  a  rise  in  prices 
in  Australia,  which  brings  into  operation  the  law  of  territorial  dis- 
tribution, the  gold  flowing  out  to  pay  balances  due  foreign  countries, 
and  the  good  money  goes  rather  than  the  bad. 


158  ELEMENTS  OF  ECONOMICS 

CHAPTER  XI. 
Problems  of  Money  and  Banking. 

98.  THE  THREE  PROBLEMS.  There  are  several  problems  of 
money  and  banking,  but  three  are  of  special  importance,  namely,  what 
the  standard  of  value  shall  be,  the  problem  of  government  paper,  in- 
volving several  questions,  and  how  banks  shall  be  organized.  In 
connection  with  the  first  problem  is  the  controversy  over  bimetal- 
lism, that  is,  whether  we  should  have  gold  as  the  single  standard 
of  value  or  both  gold  and  silver.  The  commodity  standard  has  been 
advocated  by  some  economists  as  more  just  than  either  the  gold 
standard  or  the  double  standard.  Many  people  have  advocated  gov- 
ernment paper  as  the  best  money,  and  the  adherents  of  this  idea 
have  been  numerous  enough  in  the  United  States  to  form  a  strong 
political  party  which  for  a  time  seemed  destined  to  rival  the  two 
great  parties  then  existing.  These  two  problems  seem  to  diminish 
in  importance,  since  bimetallism  and  greenbackism  are  at  the  present 
time  dead  issues.  Both  involve  such  important  consequences,  how- 
ever, that  it  seems  best  to  explain  them  briefly.  Moreover,  all  citi- 
zens should  know  the  principles  involved,  for  until  the  people  have 
sound  views  on  these  matters  there  is  always  danger  that  these 
vexing  questions  may  rise  at  any  time  in  the  future. 

The  third  problem  is  that  of  the  organization  of  our  banking 
system.  The  three  main  ends  to  be  attained  are,  (1)  that  the  banks 
shall  be  so  organized  as  to  serve  all  the  people,  and  npt  merely  those 
in  the  cities,  (2)  that  they  shall  be  safe,  so  that  depositors  and  note- 
holders do  not  lose  by  the  failure  of  banks  and,  in  a  broader  way, 
that  the  banks  do  not  help  bring  on  general  crises  and  that  they  may 
be  able  to  prevent  the  spread  of  crises  if  started  by  other  agencies, 
and  (3)  that  bank  credit,  both  the  check  currency  and  the  note  cur- 
rency, be  elastic,  that  is,  expand  in  volume  when  business  expands 
and  contract  when  business  contracts.  This  is  a  difficult  and  com- 
plex  problem.     Its   solution   raises   the   question   as   to   the  relative 


ELEMENTS  OF  ECONOMICS  159 

merits  of  the  different  banking  systems  of  the  world.  The  main 
systems  are  (1)  a  great  national  monopoly,  like  the  Bank  of  England, 
or  France,  or  Germany,  the  parent  bank  having  many  branches,  with 
rival  private  banks,  (2)  several  groups  of  great  banks,  each  with 
many  branches,  like  the  Canadian  system,  and  (3)  numerous  small, 
independent  banks,  the  system  that  we  had  in  the  United  States  be- 
fore the  Federal  Reserve  Act  of  1913.  This  is  one  of  the  most  im- 
portant problems  of  modern  industry,  involving,  as  it  does,  the  gen- 
eral prosperity  of  the  country,  for  banks  are  so  vitally  bound  up  with 
modern  industry  that  a  poor  system  of  banks  not  only  hinders  the 
normal  development  of  business  enterprises  but  may  bring  on  severe 
industrial  crises,  plunging  millions  into  temporary  poverty  and  star- 
vation. 

99.  THE  STANDARD.  The  two  main  things  to  secure  in  select- 
ing a  standard  are  that  it  b*a  stable  in  value  over  considerable  periods 
of  time  and  that  it  be  accepted  as  the  standard  by  all  nations.  A 
standard  that  is  unstable  in  value,  say  over  periods  of  ten  or  twenty 
years,  or  even  thirty  or  forty  years,  works  a  hardship  upon  annu- 
itants, or  else  unduly  enhances  their  income  and  injures  either  debt- 
ors or  creditors,  owing  to  whether  the  value  of  the  standard  rises 
or  falls.  In  the  second  place,  if  the  standard  is  not  accepted  by  the 
people  of  all  nations,  international  trade  is  hampered.  If  the  United 
States  had  silver  as  a  standard  and  European  nations  had  gold,  the 
payment  of  balances  either  way  would  always  cause  trouble,  because 
neither  side  would  have  the  money  the  other  side  desires. 

The  welfare  of  the  debtor  class  has  always  held  a  prominent  place 
in  all  controversies  regarding  the  standard.  The  advocates  of  green- 
backism  and  bimetallism,  for  example,  assumed  that  the  debtor  class 
was  composed  of  poor  people  who  were  being  unjustly  treated  by  the 
rich  because  prices  were  falling,  and  it  was  further  assumed  that  it 
was  the  duty  of  society  to  safeguard  the  interests  of  the  debtor  class 
by  preventing  a  fall  in  prices.  It  is  true  that  many  farmers  were, 
not  many  years  ago,  struggling  to  pay  off  mortgages,  and  in  a  sense 


160  ELEMENTS  OF  ECONOMICS 

might  have  been  call-ed  poor  debtors,  but  in  modern  industry  the 
vast  majority  of  debts  are  owed  by  rich  corporations  to  their  bond- 
holders, most  of  whom  are  not  rich,  but  people  in  moderate  circum- 
stances, and  including  some  working  classes,  widows  and  orphans. 
It  is  further  assumed  that  the  creditor  should  receive  in  payment  of 
his  debt  a  sum  of  money  just  sufficient  to  purchase  an  amount  of 
goods  equal  to  the  amount  the  money  would  buy  when  borrowed.  But 
what  if  prices  are  falling  because  of  cheaper  processes  of  production  ? 
In  that  case,  to  pay  back  the  debt  in  goods,  equal  in  quantity  to  what 
the  money  would  buy  when  borrowed,  would  give  the  debtor  all  tlie 
advantage  resulting  to  society  from  cheapening  processes  of  pro- 
duction. Thus,  if  the  debtor  borrows  $100  when  wheat  is  one  dollar 
a  bushel  and  then  pays  back  100  bushels  of  wheat  when  the  price 
has  fallen  to  fifty  cents  a  bushel,  because  of  better  methods  of  pro- 
ducing wheat,  the  debtor  gains  and  the  creditor  loses  all  the  benefit. 
That  raises  the  question  as  to  which  class,  if  any,  is  due  the  im- 
provements in  production.  Until  it  can  be  proved  that  either  the 
debtor  class  or  the  creditor  class  has  exclusively  given  to  society 
thes-e  improved  processes  of  production,  we  are  not  warranted  in  un- 
dertaking to  legislate  for  the  exclusive  benefit  of  either  class.  All 
that  society  is  justified  in  doing  is  to  adopt  a  reasonably  stable 
standard. 

100.  THE  COMMODITY  STANDARD.  Some  writers  believe 
that  the  commodity  standard  is  the  most  satisfactory  for  deferred 
payments.  But  the  commodity  standard  in  practice  would  be  less 
stable  than  gold,  because  it  is  not  possible  to  include  all  articles. 
Only  a  few  staple  articles  would  be  chosen  to  make  up  the  standard, 
and  the  great  staple  articles  are  the  ones  most  likely  to  be  affected 
by  new  inventions  which  will  lower  their  cost  of  production.  The 
commodity  standard  would  not  displace  gold  for  ordinary  trans- 
actions and  gold  would  be  the  actual  medium  passed  in  payment  of 
debts.  Prices  of  articles  in  the  table  would  be  noted  when  the  debt 
was  contracted  and   again   at  maturity,  and  a   sum  of  money  paid 


ELEMENTS  OF  ECONOMICS  161 

sufficient  to  buy  the  same  quantity  of  goods  as  the  money  would 
buy  when  borrowed.  It  will  be  seen,  therefore,  that  the  commodity 
standard  would  be  unstable  owing  to  changes  in  processes  of  pro- 
duction, but  the  change  would  be  upward  when  gold  is  going  down, 
and  vice  versa;  hence,  either  the  debtor  or  creditor  gains  all  the 
advantages,  owing  to  whether  the  cost  of  producing  goods  is  going 
up  or  down.  On  the  whole,  therefore,  the  commodity  standard  would 
be  less  stable  than  gold  and  no  more  just  between  debtors  and 
creditors. 

101.  BIMETALLISM.  Bimetallism  means  the  unlimited  or  un- 
restricted coinage  of  both  gold  and  silver,  at  a  fixed  ratio;  and  that 
both  metals  be  treated  as  the  standard  and  made  legal  tender.  In 
the  late  political  struggle  over  bimetallism  the  legal  ratio  proposed 
was  16  to  1,  the  present  ratio.  This  means  that  the  government  was 
to  coin  at  that  ratio  all  the  gold  and  silver  anyone  saw  fit  to  bring 
to  the  mints. 

The  causes  of  the  struggle  were  falling  prices,  the  fall  in  the 
value  of  silver  as  compared  with  gold,  and  a  large  debtor  class  among 
the  western  farmers  who  had  mortgaged  their  farms  to  get  money  to 
improve  and  stock  them.  The  fall  in  prices  from  1873  to  1896  made  it 
harder  for  farmers  to  pay  their  debts,  since  their  money  incomes 
were  shrinking  while  their  debts  remained  the  same.  The  free 
coinage  of  silver  had  been  suspended  by  the  act  of  1873,  and  about 
the  same  time  the  mints  of  the  chief  European  countries  were  closed 
to  the  free  coinage  of  silver.  These  events,  it  was  urged,  caused  the 
volume  of  the  world's  money  to  shrink  and  prices  to  fall.  This  closing 
of  th-e  mints  of  the  world  to  silver,  just  at  a  time  when  new  and  richer 
mines  were  discovered,  also  caused  the  value  of  silver  to  fall.  In 
1873  the  relative  values  were  about  16  to  1,  but  silver  rapidly  dropped 
to  about  18  to  1  by  1878. 

Both  the  debtors  and  the  silver-mine  owners  desired  free  coinage 
of  silver  at  16  to  1,  the  farmers  desiring  it  to  raise  prices  in  gen- 


162  ELEMENTS  OF  ECONOMICS 

eral  and  mine  owners  to  keep  up  the  price  of  silver.  Congressmen 
representing  these  two  interests  attempted  to  get  a  law  passed  for 
the  free  coinage  of  silver.  A  majority  did  not  favor  the  measure  but 
a  compromise  was  reached  in  the  Bland-Allison  Act  of  1878.  That 
act  provided  for  the  purchase  by  the  government  of  not  more  than 
four  million  dollars'  worth,  and  not  less  than  two  million  dollars' 
worth,  of  silver  bullion  per  month  for  coinage  into  silver  dollars. 
Under  this  act  about  thirty  million  dollars'  worth  of  silver  or  silver 
certificates  were  thrust  into  circulation  each  year  until  1890.  The 
Sherman  silver  purchase  act  of  that  year  increased  the  annual  addi- 
tion to  the  currency  to  about  fifty  million  dollars,  chiefly  in  treasury 
notes.  This  increase  in  the  currency  brought  into  play  both  the 
law  of  territorial  distribution  of  gold  and  Gresham's  law,  and  gold 
began  to  flow  out  of  the  country  so  fast  that  bank  reserves  and  the 
gold  in  the  United  States  Treasury  began  to  run  low  and  the  busi- 
ness world  began  to  fear  that  the  gold  would  all  leave  the  country, 
and  a  money  panic  resulted.  To  check  the  outflow  of  gold,  the  Sher- 
man Act  was  repealed  in  1898.  But  general  prices  and  the  price  of 
silver  were  still  falling  and  debtors  and  mine  owners  kept  up  the  fight 
for  free  silver,  resulting  in  the  political  struggle  in  1896.  The  peo- 
ple decided  against  free  silver,  and  in  1900  Congress  made  gold  the 
sole  standard,  and  the  continued  rise  in  prices  since  1896  has  made 
free  silver  a  dead  issue. 

The  arguments  of  the  bimetallists,  very  briefly  stated,  were  as 
follows:  The  fall  in  prices  was  due  to  a  decrease  in  the  supply  of 
money  and  it  was  only  just  to  debtors  to  restore  silver  to  its  former 
place  in  our  monetary  system,  so  as  to  prevent  the  fall  in  prices. 
The  most  general  argument  was  that  the  use  of  the  two  metals  made 
a  more  stable  standard,  first  because  both  together  made  a  larger 
volume  of  existing  money  and  consequently  more  stable,  since  fluctu- 
ations in  the  annual  output  of  the  mines  would  affect  its  value  less 
than  a  small  supply  would  be  affected,  and  secondly  because  a  great 
incirease  in  the  supply  of  one  metal  usually  came  just  when  the  out- 


ELEMENTS  OF  ECONOMICS  163 

put  of  the  other  was  falling  off.  As  to  the  first  point,  it  seems  that 
closing  the  mints  of  the  world  to  silver  must  have  caused  a  fall  in 
prices,  because  the  world's  business  was  rapidly  increasing  and  gold 
was  increasing  slowly.  But  the  use  of  gold  was  being  economized 
by  the  extension  of  credit,  which  would  offset  to  soma  extent  the 
fall  in  prices.  The  main  cause,  however,  for  the  fall  in  prices  dur- 
ing the  years  1873  to  1896,  was  the  fall  in  the  cost  of  production  of 
goods,  as  previously  noted.  The  first  part  of  the  second  argument 
seems  true.  The  second  part  holds  true  for  all  periods  in  the  history 
of  gold  and  silver  since  1492,  except  the  period  since  about  1890. 
Since  that  date  the  annual  production  of  gold  has  doubled  and  silver 
increased  only  about  one-third.  Under  the  stimulus  of  free  coinage 
it  is  hard  to  say  how  much  silver  would  have  been  produced.  Hence, 
the  last  argument  of  the  bimetallist  breaks  down. 

102.  GOVERNMENT  PAPER.  The  second  group  of  problems 
is  concerned  with  government  paper.  It  has  been  urged  by  a  good 
many  people,  enough  in  fact  to  form  a  large  political  party,  (1)  that 
government  paper  is  the  best  money  because  it  is  the  cheapest,  (2) 
that  the  government  and  not  private  individuals,  as  banks,  should 
supply  the  country  with  currency,  (3)  that  it  is  safe,  and  (4)  it  is 
convenient. 

Government  paper  may  be  dieaper  to  society  than  the  precious 
metals,  because  it  costs  little  to  make  it.  But  gold  is  used  chiefly 
as  bank  and  government  reserves  behind  paper  currency,  and  being 
handled  little  is  not  worn  out  rapidly.  But  government  paper  is  no 
cheaper  to  society  than  bank  paper.  Nor  is  government  paper  any 
more  convenient  than  bank  notes,  and  for  the  wholesale  trade  not  as 
convenient  as  bank  checks.  The  two  main  questions  are  those  con- 
cerned with  the  safety  of  government  paper  and,  most  important  of 
all,  with  the  substitution  of  government  paper  for  bank  paper. 

History  abundantly  proves  that  government  paper  is  not  as  safe 
as  bank  paper.  In  times  of  urgent  need,  as  in  case  of  a  war,  it  is  too 
easy  to  set  the  printing  press  at  work  running  off  paper  money,  and 


164  ELEMENTS  OF  ECONOMICS 

legislatures  prefer  that  method  of  raising  revenue  to  that  of  in- 
creased taxation.  With  the  inflation  of  the  currency  metallic  money 
is  driven  out  and  the  par  of  exchange  with  other  nations  is  broken, 
the  country  being  placed  on  a  paper  basis.  Moreover,  the  value  of 
the  paper  fluctuates  violently  with  the  changing  prospects  of  a  re- 
turn to  a  sound  metallic  basis,  to  the  very  great  injury  of  business. 
On  the  other  hand,  the  government  is  not  inclined  to  allow  banks  to 
be  lax  about  meeting  their  demand  liabilities,  because  the  government 
has  nothing  to  gain  by  that  policy.  The  government  is  more  ^t, 
therefore,  to  require  the  banks  to  make  their  paper  currency  safe 
by  redeeming  it  on  demand  than  it  is  to  provide  for  the  redemption, 
on  demand,  of  its  own  paper  currency.  By  the  terms  of  the  law  of 
1900  Congress  has  provided  for  the  redemption  of  its  paper  currency 
by  requiring  the  Secretary  of  the  Treasury  to  keep  on  hand  $150,000,- 
000  in  gold  as  a  reserve  fund.  But  under  urgent  conditions  this  law 
might  easily  be  repealed. 

The  demand  that  government  paper  shall  take  the  place  of  bank 
paper  scarcely  deserves  serious  consideration.  Government  paper 
serves  merely  as  a  medium  of  exchange  in  the  retail  trade.  It  does 
not  perform  the  functions  of  bank  paper,  which  not  only  serves  as  a 
medium  of  exchange  but  also  is  an  agent  in  production.  If  a  business 
man  desires  a  loan  to  expand  his  business,  government  paper  does 
not  help  him,  as  the  bank  does.  The  government  puts  its  paper  into 
circulation,  not  by  loaning  it,  but  by  paying  its  debts. 

103.  THE  FUNCTIONS  OF  BANKS.  Banks  perform  two  great 
functions;  they  borrow  money  and  loan  their  credit.  What  a  bank  bor- 
rows is  usually  termed  deposits,  which  consist  of  actual  cash  deposited 
and  deposits  resulting  from  discounting  commercial  paper,  the  latter 
constituting  the  chief  portion  of  deposits.  If  a  bank  receives  on  de- 
posit the  proceeds  of  a  discount  operation  the  bank  really  borrows  of 
the  depositor,  though  no  actual  money  is  put  into  the  bank.  But  the 
depositor  has  a  right  to  draw  his  deposits  out  of  the  bank  in  the 


ELEMENTS  OF  ECONOMICS  165 

form  of  money.  Depositing  the  proceeds  of  discount  operations, 
therefore,  does  not  increase  the  money  in  the  bank  but  prevents  the 
decrease  in  the  cash  reserves.  Hence,  the  bank  is  practically  borrow- 
ing money  of  the  depositor.  What  the  banks  loan  is  their  own  credit, 
either  in  the  form  of  bank  notes  or  bank  checks,  the  latter  being 
based  upon  the  desposit  account.  Banks  might  loan  actual  money, 
but  the  vast  majority  of  their  loans  consists  of  bank  credit. 

Let  us  take  a  typical  case  to  see  how  the  functions  of  a  bank  are 
brought  into  play  and  how  bank  notes  and  checks  are  put  into  circu- 
lation. If  a  manufacturer  wishes  to  expand  his  business  he  may  need 
to  enlarge  his  plant,  and  to  do  so  wishes  to  borrow  of  the  bank.  He 
^ives  the  bank  his  promisory  note,  or  the  note  of  some  other  person 
due  him  in  the  future,  which  the  bank  discounts  and  gives  the  bor- 
rower the  proceeds  either  in  bank  notes  or  a  deposit  account  against 
which  checks  may  be  issued,  or  the  borrower  may  take  part  of  the 
proceeds  in  notes  and  deposit  the  remainder.  In  this  simple  trans- 
action lie  all  the  mysteries  of  the  banking  functions,  which  seem  so 
puzzling  to  beginners,  but  which  are  easily  understood  if  this  example 
is  studied  with  care. 

From  this  example  the  two  great  services  of  banks  to  the  com- 
munity are  seen.  In  the  first  place,  bank  credit  aids  in  production 
in  a  very  peculiar  way.  Suppose  no  such  thing  as  credit  were  known. 
The  manufacturer  referred  to  above  could  not  expand  his  business 
immediately  unless  he  had  actual  money.  If  he  had  not,  he  would 
have  to  wait  maybe  several  years  before  he  could  save  enough  to  in- 
crease the  size  of  his  factory.  If  banks  loaned  actual  money  he 
could  immediately  begin  the  addition  of  his  plant.  If  banks  loaned 
their  credit,  they  could  loan  much  more.  Thus  credit  is  a  means  of 
coining  property  into  purchasing  power  without  selling  the  property, 
as  it  is  merely  pledged  as  security  to  the  bank.  Credit,  therefore, 
quickens  the  process  of  production,  enabling  industry  to  expand 
rapidly,  in  a  way  that  even  money  cannot  do.  The  error  of  supposing 
that  government  paper  can  serve  the  function  of  bank  paper  is  at 


166  ELEMENTS  OF  ECONOMICS 

once  apparent,  unless  the  government  loans  to  individuals  and  thus 
assumes  the  banking  functions.  Another  look  at  our  typical  case  will 
reveal  the  fact  that  bank  currency  is  elastic.  As  business  expands, 
the  currency  expands.  If  the  cost  of  increasing  the  size  of  the  fac- 
tory is  $10,000,  the  notes  or  checks  are  issued  to  that  amount.  As 
each  man  desires  to  expand  his  business,  the  volume  of  the  currency 
automatically  expands.  As  the  volume  of  business  contracts,  the 
volume  of  the  credit  currency  contracts.  When  the  volume  of  busi- 
ness contracts,  men  do  not  borrow  so  much  from  the  banks,  and  as 
their  promissory  notes  to  the  banks  fall  due,  bank  notes  and  deposits 
are  turned  in  as  payment  and  automatically  the  note  and  deposit 
currency  contracts.  Neither  metallic  money  nor  government  paper 
will  thus  expand  and  contract  with  the  volume  of  business. 

Economists  as  a  rule  recognize  three  banking  functions,  deposit, 
discount,  and  note  issue.  But  this  classification  is  faulty,  in  that  it 
conceals  the  real  functions  of  banks,  which  are  only  two,  borrowing 
money  and  lending  credit.  The  deposit  function  is  that  of  borrowing 
money,  as  noted  above.  If  the  proceeds  of  a  discounted  note  are  de- 
posited, the  bank  allows  the  depositor  to  use  its  credit  as  means  of 
purchase,  that  is,  the  bank  does  not  loan  money  but  its  credit.  If 
bank  notes  are  given  instead  of  a  deposit  account,  the  bank  loans  its 
notes.  In  either  case,  the  bank  loans  its  promise  to  pay,  or  its  credit. 
Discounting  is  not  in  itself  a  function,  but  is  only  an  incidental  oper- 
ation in  loaning  bank  credit,  the  discounted  note  being  the  security 
for  the  loan.  There  are,  however,  some  reasons  for  distinguishing  be- 
tween the  loaning  of  bank  notes  and  the  loaning  of  deposit  or  check 
currency,  since  the  two  forms  of  currency  serve  for  different  pur- 
poses, one  for  wholesale  and  the  other  for  retail  transactions.  But 
in  both  cases  the  bank  is  loaning  its  credit,  and  the  bank  performs 
but  two  functions,  borrowing  money  and  loaning  its  credit. 

104.  NEEDED  CHARACTERISTICS  OF  BANKS.  The  three 
most  vital  characteristics  needed  in  a  banking  system  are  (1)  the 
ability  to  serve  all  the  legitimate  banking  needs  of  all  people  in  all 


ELEMENTS  OF  ECONOMICS  167 

sections  of  the  country,  at  reasonable  rates  of  interest,  (2)  stability, 
and  (3)  elasticity  of  its  currency.  In  order  to  fulfill  the  first  re- 
quirement, there  must  be  banking  institutions  in  the  smaller  cities 
and  within  the  reach  of  rural  communities,  and  the  security  upon 
which  loans  are  made  must  be  suited  to  the  district.  In  order  to 
meet  the  needs  of  the  commercial  centers,  the  personal  note  backed 
by  property  readily  salable  is  required,  while  in  a  rural  community 
land  is  often  the  only  security  that  can  be  offered.  Land,  however, 
is  not  readily  salable  and  is  not  good  security  for  a  commercial  bank 
which  may  need  quickly  to  dispose  of  the  property  should  it  come  in- 
to its  possession,  because  sudden  reverses  are  more  liable  to  over- 
take a  commercial  community  than  a  rural  community.  City  banks, 
therefore,  should  loan  only  on  "bankable"  property  as  security  and 
for  a  short  period  of  time,  while  country  banks  should  be  allowed  to 
accept  real  estate  as  security  and  loans  should  be  allowed  to  run  sev- 
eral years,  since  farmers  often  borrow  to  make  improvements,  and 
several  years  are  often  required  in  which  to  make  payment.  In  or- 
der to  secure  reasonable  rates  there  must  be  healthful  competition 
among  banks  or  effective  regulation  by  the  government. 

There  is  special  need  for  banks  to  be  strong  and  stable.  In 
these  modem  days  of  interrelationships  among  business  men,  the 
failure  of  any  business  may  injure  or  ruin  other  firms.  But  this  is 
especially  true  of  banks,  for  they  deal  in  credit,  which  is  a  very  del- 
icate thing.  A  very  large  part  of  modern  business  is  done  on  credit 
and  banks  are  not  supposed  to  keep  a  cash  reserve  of  more  than  15 
to  25  per  cent  of  their  outstanding  demand  liabilities,  consisting 
mainly  of  notes  and  checks,  because  ordinarily  people  do  not  demand 
money  for  notes  or  checks  received,  but  deposit  them.  Suppose  a 
large  business  establishment  fails.  Its  failure  may  ruin  some  local  bank 
that  has  loaned  the  firm  large  amounts.  This  bank  failure  spreads 
alarm  among  depositors  in  other  banks  in  the  community,  and  there 
is  a  "run"  on  the  banks,  that  is,  depositors  and  note  holders,  if  notes 
are  not  especially   secured  by  the  government,  desire  to   get  their 


168  ELEMENTS   OF   ECONOMICS 

money  out  of  the  bank.  The  banks  cannot  pay  all  their  demand  liabil- 
ities at  once,  though  the  commercial  paper  they  own  may  be  perfectly 
good  and  the  banks  may  be  in  a  sound  condition.  But  by  law  if  a 
bank  cannot  pay  its  demand  liabilities  on  demand  it  must  close  its 
doors  to  business  and  the  bank  has  "failed"  in  the  eyes  of  the  law 
and  of  the  public.  The  closing  of  the  banks  in  one  locality  may 
spread  the  fear  throughout  the  country  and  the  "run"  on  the  banks 
may  become  general,  accompanied  with  the  same  results  as  in  the 
original  locality.  The  closing  of  the  banks,  even  temporarily,  injures 
industry,  because  it  deprives  the  community  of  its  accustomed  means 
of  transacting  business,  and  some  men  might  even  be  ruined.  Thus 
the  sudden  collapse  of  credit  may  cause  widespread  panic  which  is 
followed  by  industrial  depression.  If  business  generally  has  been 
conducted  On  a  sound  basis  and  the  panic  is  largely  fear  on  the  part 
of  depositors,  the  whole  phenomenon  may  run  its  course  in  a  few 
weeks.  But  if  business  has  not  been  sound,  industrial  depression  may 
last  several  years.  In  the  great  crisis  of  1837,  for  example,  there 
was  a  large  amount  of  speculation  and  overbuilding  of  roads  and  can- 
als. People  borrowed  of  the  banks  to  get  funds  for  their  speculative 
ventures  which  did  not  pay  dividends,  banks  could  not  collect  from 
Vieir  creditors,  and  banks  and  business  firms  failed  all  over  the 
country.  In  this  case  the  collapse  of  credit  was  not  the  result  of 
mere  fright  on  the  part  of  depositors,  and  it  took  four  or  five  years 
for  industry  to  recover  from  the  shock.  The  banks  were  to  blame  for 
this  disaster  in  so  far  as  they  encouraged  speculative  business  by 
granting  loans  for  such  enterprises.  Banks  should  be  safe  in  the 
sense  that  they  should  loan  only  for  healthful  industrial  development 
and  they  should  be  strong  enough  to  resist  a  panic  that  starts  from 
mere  fear  of  depositors,  or  better  still,  so  strong  that  depositors  have 
no  fear  of  bank  failures  becoming  general  in  case  a  few  go  under. 

In  the  third  place  bank  currency  should  be  elastic.  In  the  fall  of 
the  year  farmers  and  grain  dealers  in  the  West  need  an  extra  amount 
of  currency  to  move  the  crops  and  pay  help.     This  calls  for  bank 


ELEMENTS   OF   ECONOMICS  169 

notes,  mostly,  owing  to  the  business  habits  of  the  community.  Far- 
mers and  their  hired  help  both  prefer  "money"  to  checks,  and  notes 
are  accepted  as  money.  In  the  great  commercial  centers  the  currency 
needs  to  be  elastic,  for  such  centers  have  their  periods  of  comparative 
briskness  and  succeeding  calm.  During  the  first  part  of  January,  for 
example,  large  sums  are  needed  for  payments  of  dividends  and  other 
annual  settlements. 

105.  DEFECTS  IN  OUR  BANKING  SYSTEM  PREVIOUS  TO 
1913.  Previous  to  the  passing  of  the  Federal  Reserve  Act  of  1913, 
our  banking  system  lacked  all  three  of  the  characteristics  considered 
above  and  besides  had  several  other  defects.  Andrew  Carnegie  once 
called  it  the  worst  banking  system  in  the  world.  The  national  banks 
could  be  of  little  service  to  rural  communities,  because  they  could  not 
loan  on  real  estate.  Most  of  the  state  banks  w-ere  also  commercial 
banks.  The  farming  community  was  not  properly  served,  and  what 
loans  they  were  able  to  secure  were  at  prohibitive  rates. 

Banks  were  not  safe  and  stable.  There  were  over  30,000  banking 
institutions  in  the  country,  small  and  independent  of  each  other.  The 
failure  of  a  large  firm  might  pull  down  several  banks,  and  then  the 
panic  would  spread.  There  was  little  cooperation  at  such  times,  each 
bank  struggling  to  keep  its  reserves.  Hence  the  reserves  of  the 
country  were  scattered  and  immobile,  instead  of  being  centralized 
and  under  the  control  of  a  single  authority  that  could  send  them 
where  needed  and  thus  check  a  crisis.  If  reserves  could  be  sent 
quickly  to  any  point  of  danger,  fear  of  depositors  would  be  allayed, 
for  when  people  find  they  can  get  their  money  they  do  not  want  it. 
Another  source  of  danger  to  the  banks  was  the  close  connection  be- 
tween the  eastern  banks  and  Wall  Street,  the  main  center  of  specu- 
lative operations  in  the  country.  Men  who  speculated  in  stocks  and 
bonds  borrowed  of  the  banks  and  frequent  failures  of  the  speculators 
weakened  the  banks. 

The  third  great  defect  in  our  banking  system  was  the  inelastic- 
ity of  credit.     Note  currency  was  inelastic  becaus-e  based  upon  bonds 


170  ELEMENTS  OF  ECONOMICS 

of  the  United  States  government.  If  a  bank  wished  to  issue  notes  it 
had  to  buy  bonds  equal  in  value  to  the  amount  of  notes  issued.  This 
made  the  volume  of  note  currency  inelastic  for  three  reasons.  The 
amount  of  government  bonds  was  a  fixed  quantity,  the  amount  on  the 
market  was  not  enough  to  permit  of  much  expansion,  and  even  if 
bonds  were  to  be  had  in  abundance  the  banks  did  not  wish  to  disturb 
their  regular  investments  for  a  temporary  increase  in  note  circula- 
tion. The  check  currency  was  inelastic  for  several  reasons.  The  re- 
quirements as  to  reserves  were  rigid  and  banks  too  often  kept  close 
to  the  minimum  amount  allowed,  and  in  time  of  need  they  could  nat 
expand  their  credit  and  help  business  men  whose  financial  needs 
were  increased  by  business  depression,  as  they  ought  to  have  done.  If 
some  depositors  got  frightened  and  drew  out  their  deposits,  that  de- 
pleted the  bank  reserves  and  decreased  the  power  of  the  banks  to 
make  new  loans  until  restored  by  selling  commercial  paper,  or  stocks 
and  bonds,  or  by  the  collection  of  debts  due  them.  Generally  in  time 
of  a  panic  commercial  paper  is  not  easily  sold,  and  banks  must  wait 
until  notes  due  them  are  paid. 

106.  THE  FEDERAL  RESERVE  ACT.  In  1913  Congress 
passed  the  Federal  Reserve  Act,  which  was  intended  to  correct  two 
of  the  main  evils  in  our  banking  system  and  to  some  extent  to  cor- 
rect the  third  defect.  Before  considering  how  the  act  proposed  to 
remedy  these  defects  it  will  be  well  to  look  at  the  general  nature  of 
the  reorganization  of  the  banking  system.  The  act  neither  set  up  a 
great  monopolistic,  unified  system  like  the  Bank  of  England  nor  did 
it  leave  the  little  banks  independent  of  each  other,  as  they  formerly 
were.  Instead,  it  created  a  sort  of  federated  system,  with  central 
control  in  certain  matters  by  a  government  Federal  Reserve  Board. 
The  act  provided  for  the  division  of  the  whole  continental  area  of  the 
United  States,  exclusive  of  Alaska,  into  federal  reserve  districts,  not 
less  than  eight  nor  more  than  twelve,  the  number  to  be  determined 
by  the  Federal  Reserve  Board.  In  each  district  is  a  federal  reserve 
bank,  with  branches.     The  federal  reserve  banks  are  fairly  large  in- 


ELEMENTS  OF  ECONOMICS  171 

stitutions  with  a  capital  of  not  less  than  $4,000,000,  and  are  mainly 
bankers'  banks,  as  their  business  is  mainly  to  be  with  member  banks, 
and  banks  are  the  only  stockholders  having  voting  power.  AU 
national  banks  must  become  members  of  a  federal  reserve  bank 
and  other  banks  may  become  members.  The  federal  reserve  bank  has 
power  to  open  deposit  accounts  with  member  banks  and  with  the 
United  States,  to  deal  in  bills  of  exchange,  and  to  issue  federal  re- 
serve notes  to  member  banks,  under  the  supervision  of  the  Federal 
Reserve  Board. 

This  Federal  Reserve  Board  is  composed  of  seven  members,  the 
Secretary  of  the  Treasury  and  the  Comptroller  of  th-e  Currency  as 
members  ex-officio,  and  five  others  appointed  by  the  President  of  the 
Unit-ed  States,  by  and  with  the  advice  and  consent  of  the  Senate. 
Each  member  of  the  Board  receives  a  salary  of  $12,000  a  year,  and 
none  is  to  be  connected  with  any  bank,  either  as  officer  or  stock- 
holder, though  at  least  two  besides  the  members  ex-officio  are  to  be 
men  with  experience  in  banking  or  finance.  The  Board  has  power  (1) 
to  examine  the  federal  res-erve  banks  and  the  member  banks,  (2)  to 
allow  or  require  federal  reserve  banks  to  re-discount  the  discounted 
paper  of  other  federal  reserve  banks,  at  rates  of  interest  to  be  fixed 
by  the  Federal  Reserve  Board,  (3)  to  suspend  reserve  requirements,  (4) 
to  exercise  general  supervision  over  the  federal  reserve  banks,  and 
(5)  to  issue  notes  to  the  federal  reserve  banks. 

This  act  also  creates  a  federal  advisory  council  consisting  of  one 
representative  of  each  federal  reserve  bank.  As  the  name  implies, 
the  council  has  only  advisory  powers,  which  are  to  confer  with  the 
Federal  Reserve  Board,  and  to  make  recommendations  in  regard  to 
discount,  rates,  re-discounts,  note  issues  and  reserve  conditions  in  the 
different  districts. 

Thus  the  banks  of  each  district  are  federated  with  the  federal  re- 
serve bank,  and  the  Federal  Reserve  Board  has  general  supervision 
over  the  whole  system,  advised  and  assisted  by  the  council.    This  sys- 


172  ELEMENTS   OF   ECONOMICS 

tern  leaves  the  member  banks  free  to  follow  their  ordinary  course  of 
business  in  their  ordinary  way,  the  federal  reserve  banks  and  the  Fed- 
veral  Reserve  Board  checking  them  up  in  case  they  wish  to  extend  their 
loans  and  assisting  them  in  times  of  danger.  The  whole  system 
roughly  approaches  the  organization  of  our  federal  system  of  gov- 
ernment, and  possesses  some  of  its  advantages,  the  local  banks 
serving  local  needs,  the  federal  reserve  banks  answering  to  the  states, 
which  look  after  larger  affairs,  and  the  Federal  Reserve  Board  cor- 
responding to  the  national  government,  which  looks  after  the  needs 
of  the  whole  countrv. 

107.  SERVICE.  The  act  only  partially  removes  the  first  defect 
above  noted  in  that  it  does  not  establish  a  thorough  system  of  rural 
credit.  National  banks  are  permitted  to  make  loans  secured  by  farm 
lands,  under  certain  restrictions.  This  feature  of  the  act  seemingly 
is  intended  as  a  temporary  arrangement,  and  the  whole  subject  of 
rural  credit  is  yet  to  be  acted  upon  by  Congress. 

In  a  general  way,  however,  the  act  contains  several  provisions 
designed  to  guard  the  general  interests  of  the  people.  The  fact  that 
a  federated  system  of  small  banks  was  created  rather  than  a  great 
monopoly  will  insure  good  service  at  least  to  all  commercial  inter- 
ests. Also  th^  governmental  control  and  oversight  ought  to  insure 
good  service.  Actual  banking  operations  and  the  business  manage- 
ment is  in  the  hands  of  the  banks,  the  government  only  exercising 
general  control.     Thus  efficiency  and  service  seem  to  be  secured. 

Reasonable  rates  would  seem  to  be  assured  because  of  several 
features  of  the  new  system.  The  act  did  not  create  a  monopoly  but 
left  the  individual  banks  still  independent  to  a  large  extent,  and  pre- 
sumably competition  among  the  member  banks  will  keep  rates  of 
interest  at  a  reasonable  level.  The  power  of  the  federal  reserve 
banks  and  of  the  Federal  Reserve  Board  ought  also  to  keep  dow^n 
rates  of  interest.  In  case  of  stringency  in  the  money  market  the 
federal  reserve  banks  can  compete  with  the  member  banks  through 
what  the  Act  calls  open-market  operations.    In  its  first  report,  issued 


ELEMENTS   OF   ECONOMICS  173: 

January,  1915,  the  Federal  Reserve  Board  says,  "If,  at  any  time,  com- 
merce, industry  or  agriculture  are,  in  the  opinion  of  the  Federal  Re- 
serve Board,  burdened  unduly  with  excessive  interest  charges,  it  will 
be  the  clear  and  imperative  duty  of  the  Board  acting  through  the 
discount  rate  and  open-market  powers  to  secure  a  wider  diffusion 
of  credit  at  reasonable  rates." 

108.  SAFETY.  Under  the  new  system  banks  should  be  more 
safe,  individually  and  collectively,  than  under  the  old  system  because 
of  (1)  the  federal  system,  (2)  the  central  control  of  reserves  and 
note  issue,  (3)  severing  the  connection  with  Wall  Street,  (4)  govern- 
ment control,  and  (5)  making  the  banks  United  States  depositories. 
Banks  are  no  longer  wholly  independent  of  each  other.  Especially  in 
times  of  danger  or  when  reserves  of  any  bank  are  running  low,  it 
can  borrow  of  the  federal  reserve  bank  of  its  district  by  re-discount- 
ing commercial  paper  and  thus  strengthen  itself.  The  federal  re- 
serve bank  thus  aids  its  members  and  at  the  same  time  limits  their 
actions  and  also  examines  the  soundness  of  the  commercial  paper 
re-discounted.  By  this  means  and  the  power  of  general  oversight 
the  whole  system  of  banks  within  each  district  is  tied  together 
and  made  safe  and  strong. 

The  Federal  Reserve  Board  has  general  control  of  reserves  and 
by  requiring  federal  reserve  banks  to  re-discount  discounted  paper 
of  other  federal  reserve  banks  can  cause  reserves  to  flow  from  one 
district  to  another  as  they  are  needed.  Thus  reserves  become  mo- 
bile and  the  whole  system  of  banks  is  stronger  because  there  are  no 
weak  links  in  the  chain. 

Connection  with  Wall  Street  is  severed  by  the  provision  that 
allows  the  banks  to  discount  commercial  paper  "arising  out  of  actual 
commercial  transactions"  but  prohibits  the  banks  from  discounting 
"notes,  drafts,  or  bills  covering  merely  investments  or  issued  or 
drawn  for  the  purpose  of  carrying  or  trading  in  stocks,  bonds,  or 
other  investment  securities,  except  bonds  and  notes  of  the  Govern- 
ment of  the  United  States." 


174  ELEMENTS  OF  ECONOMICS 

Government  control  should  increase  the  safety  of  the  whole 
system  since  the  Federal  Reserve  Board,  assisted  by  the  advisory 
council,  is  in  a  position  to  know  the  needs  of  the  different  parts  of 
the  country,  and  through  its  power  of  inspection  and  control  of  re- 
serves and  note  issue  can  prevent  the  spread  of  panics  and  to  a 
considerable  extent  prevent  them  from  starting.  The  whole  system 
will  naturally  give  depositors  more  confidence  in  the  safety  of  it 
and  they  will  be  less  likely  to  start  a  "run"  on  the  banks  in  case 
any  one  bank  should  fail,  which  it  is  less  likely  to  do  than  foi*- 
merly.  The  fact  that  the  banks  are  made  depositories  of  the  United 
States  government  would  tend  to  strengthen  them  because  of  the 
more  careful  inspection  this  will  lead  to  and  because  of  the  increased 
confidence  this  will  inspire  among  the  people. 

In  addition  to  all  these  provisions  for  the  general  safety  o€ 
the  banks,  the  federal  reserve  notes  are  especially  secured  by  sev- 
eral provisions.  Banks  must  keep  a  gold  reserve  of  40  per  cent  of 
the  value  of  notes  issued.  This  requirement  may  be  suspended  tem- 
porarily by  the  Federal  Reserve  Board,  which  also  increases  general 
safety  of  business,  because  more  aid  can  be  extended  to  member 
banks  if  the  need  is  urgent.  The  issue  of  notes  is  under  the  control 
of  the  Federal  Reserve  Board,  which  would  check  any  tendency  to 
over-issue.  And,  most  important  of  all,  the  United  States  Treasury 
must  redeem  these  notes  on  demand.  These  provisions  make  the 
new  notes   as   good  as   gold, 

109.  ELASTICITY  OF  CREDIT.  The  act  makes  bank  credit 
elastic.  The  federal  reserve  notes  are  based  upon  a  gold  reserve 
of  40  per  cent  of  the  note  circulation  and  upon  commercial  paper, 
and  not  upon  government  bonds.  If  a  federal  reserve  bank  desires 
notes,  it  deposits  with  the  government  agent  at  the  bank  approved 
securities  equal  in  value  to  the  amount  of  notes  desired.  If  a  mem- 
ber bank  wishes  notes  to  loan  to  its  customers  it  sends  to  the  federal 
reserve  bank  commercial   paper  for  re-discount.     Thus   bank  notes 


ELEMENTS  OF  ECONOMICS  175 

will  automatically  increase  with  the  increase  of  business,  and  the 
only  limits  to  the  increase  are  the  discretion  of  the  Federal  Re- 
serve Board  and  of  the  federal  reserve  banks,  and  the  amount  of 
gold  reserve.  The  Federal  Reserve  Board  may  temporarily  suspend 
the  reserve  requirements,  the  abuse  of  this  privilege  being  prevented 
by  a  tax  on  the  note  circulation  not  backed  by  the  gold  reserve. 
Thus  the  expansibility  of  the  note  circulation  is  amply  secured. 
To  secure  the  contraction  of  the  note  circulation  when  business  con- 
tracts, the  act  provides  that  no  federal  reserve  bank  shall  pay  out 
the  notes  of  another  bank,  but  shall  promptly  return  for  credit  or 
redemption  all  such  notes  to  the  bank  through  which  they  were 
issued. 

Check  currency  is  made  more  elastic  by  less  rigid  requirements 
as  to  reserves  and  by  the  mobility  of  the  general  reserve  funds 
of  the  whole  country.  Under  the  old  system,  banks  in  the  smaller 
cities  were  required  to  keep  a  reserve  of  15  per  cent  of  their  de- 
posits and  banks  in  the  larger  cities  were  required  to  keep  a  re- 
serve of  25  per  cent,  and  no  matter  how  urgent  the  circumstances 
these  reserves  had  to  be  maintained.  Under  the  new  act  the  federal 
reserve  banks  must  maintain  reserves  equal  to  35  per  cent  of  de- 
posits. Member  banks  in  small  cities  must  maintain  a  reserve  of 
12  per  cent  of  its  deposits,  banks  in  larger  or  "reserve"  cities  as 
they  are  called,  must  keep  a  reserve  of  15  per  cent  and  banks  in 
"central  reserve"  cities,  18  per  cent.  In  each  case  a  member  bank 
must  keep  a  certain  proportion  of  its  reserves  on  deposit  with  the 
federal  reserve  bank.  This  centralizes  the  reserves  to  a  great  ex- 
tent, giving  a  large  fund  of  gold  in  one  bank,  and  enables  the  federal 
reserve  bank  to  come  to  the  assistance  of  any  member  bank  in  need. 
These  requirements  may  be  suspended  temporarily  by  the  Federal 
Reserve  Board.  Thus  in  times  of  financial  stress,  credit  may  be 
extended  and  the  trouble  relieved.  Mobility  of  reserves  within  the 
federal   reserve   district  is   secured  by   the   member  banks   securing 


176  ELEMENTS  OF  ECONOMICS 

more  reserves  when  required  by  sending  discounted  paper  to  the 
federal  reserve  bank  for  re-discount;  and  mobility  over  the  whole 
country  is  secured  by  the  power  of  the  Federal  Reserve  Board  to 
require  federal  reserve  banks  to  re-discount  paper  of  other  federal 
reserve  banks.  This  mobility  increases  the  elasticity  of  check  cur- 
rency by  sending  reserves  where  they  are  wanted,  and  by  check- 
ing the  fears  of  the  people,  which  formerly  caused  credit  to  con- 
tract when  it  ought  to  expand. 


ELEMENTS  OF  ECONOMICS  177 

CHAPTER  XII. 
International  Trade. 

110.  THE  LONG  CONTROVERSY.  The  problem  of  interna- 
tional trade  has  been  a  political  issue  and  a  matter  of  controversy 
among  great  thinkers  for  over  four  hundred  years,  and  we  do  not 
propose  in  this  brief  chapter  to  decide  the  question,  but  merely  to 
enable  the  student  to  see  what  the  controversy  means  and  to  set  him 
to  thinking  for  himself.  There  have  been  various  phases  of  the  con- 
troversy. From  about  1500  to  1800  it  concerned  the  Balance  of  Trade. 
During  that  period  most  nations  acted  upon  the  theory  that  trade 
ought  to  be  so  regulated  that  a  great  quantity  of  gold  and  silver 
should  flow  in.  Each  nation  was  trying  to  get  a  favorable  balance  of 
trade,  as  it  was  called,  that  is,  it  was  trying  to  accumulate  a  great 
stock  of  gold  by  selling  more  goods  than  it  bought. 

This  theory  was  based  on  various  misconceptions.  In  the  first 
place  money  was  looked  upon  as  being  the  all-important  form  of 
wealth.  It  was  not  seen  that  whoever  has  any  form  of  marketable 
wealth  has  the  means  of  obtaining  money.  Another  mistaken  notion 
was  the  belief  that  trade  was  a  one-sided  affair,  the  seller  getting 
the  best  of  the  bargain.  The  obvious  truth  was  overlooked  that  the 
buyer  gains  as  well  as  the  seller,  since  he  disposes  of  what  he  does 
not  want  and  obtains  what  he  does  want.  Clearer  thinkers  than 
those  in  control  of  governments  finally  overthrew  the  Balance  of 
Trade  idea,  and  now  nations  do  not  trouble  themselves  about  regu- 
lating trade  in  such  a  way  as  to  cause  gold  to  flow  into  the  country. 
The  fact  that  for  three  centuries  all  civilized  nations  accepted  and 
acted  upon  false  theories  should  teach  us  a  lesson,  and  that  lesson 
is  that  the  majority  are  not  necessarily  right. 

For  over  a  century  the  dispute  has  been  over  the  effects  of  a 
protective  tariff.  Most  nations  now  act  upon  the  theory  that  inter- 
national trade  ought  to  be  restricted  in  such  a  way  as  to  build  up 
certain  industries  that  otherwise  would  not  develop.    In  other  words, 


178  ELEMENTS   OF   ECONOMICS 

a  protective  tariff  seeks  to  encourage  the  development  of  the  pro- 
tected industry  by  enabling  producers  to  raise  prices  above  the  rates 
determined  by  free  competition  between  home  producers  and 
foreign  producers.  But  the  mere  fact  that  the  majority  believe  one 
way  or  the  other  should  have  no  weight  whatever,  since  majorities 
in  the  past  have  been  wrong  and  may  be  wrong  now.  Each  person 
must  approach  the  subject  with  open  mind. 

111.  ADVANTAGES  OF  INTERNATIONAL  TRADE.  The 
main  advantage  of  international  trade  is  that  resulting  from  inter- 
national division  of  labor.  Different  countries  have  different  nat- 
ural resources  and  different  climatic  conditions.  Countries  with  fer- 
tile soil  but  poor  in  mineral  resources  will  naturally  turn  their  en- 
ergies to  agriculture,  countries  with  rich  mineral  resources  but  poor 
soil  will  develop  manufacturing,  while  countries  with  various  ad- 
vantages will  have  diversified  industries.  This  will  be  the  natural 
development  if  commerce  is  free  among  nations.  Each  nation  will 
turn  its  main  energies  towards  developing  its  best  natural  re- 
sources, export  its  surplus  products  of  those  industries  and  buy 
from  other  nations  those  things  that  it  cannot  produce  at  all  or 
only  at  a  great  disadvantage.  Thus  each  nation  makes  the  best  pos- 
sible use  of  its  labor  and  capital.  If  a  nation  with  poor  mineral  re- 
sources but  rich  soil  should  undertake  to  produce  all  its  manufactured 
goods  the  energies  of  that  nation  would  be  wasted.  By  world-wide 
cooperation  in  satisfying  human  wants  the  whole  world  becomes 
richer. 

This  beneficial  result  would  be  produced,  not  by  any  formal 
agreement  among  nations  as  to  what  each  would  produce,  but  by 
ordinary  world  competition  in  the  world  markets.  The  great  staple 
articles  of  the  world  have  a  world  price,  which  is  roughly  uniform 
in  all  countries,  not  counting  cost  of  transportation.  Each  country 
will  produce  for  export  those  things  that  bring  the  highest  profits, 
at   the   prevailing   world    prices.      The    things    that    yield    the    most 


ELEMENTS  OF  ECONOMICS  179 

profits  are  those  that  can  be  produced  cheapest,  since  profits  are 
determined  by  selling  price  minus  cost. 

Owing  to  the  fact  that  labor  and  capital  do  not  move  from 
country  to  country  with  perfect  freedom,  rates  of  profit  are  differ- 
ent in  different  countries.  This  brings  it  about  that  a  country  might 
have  a  positive  advantage  over  other  countries  in  producing  certain 
things  and  yet  not  produce  those  things  but  import  them,  since 
it  might  have  a  greater  advantage  over  other  countries  in  producing 
other  things.  Suppose  a  given  unit  of  labor  and  capital  in  a  given 
time  could  produce  in  England  t^  dollars'  worth  of  wheat,  or  fif- 
teen dollars'  worth  of  steel,  and  the  same  unit  of  labor  and  capital  in 
the  same  time  can  produce  in  the  United  States  twenty  dollars' 
worth  of  wheat  and  eighteen  dollars'  worth  of  steel.  Under  these 
conditions  the  United  States  would  make  more  profits  than  England 
by  producing  either  wheat  or  steel.  But  it  will  make  the  most  by  pro- 
ducing wheat.  Thus  we  arrive  at  the  celebrated  principle  that  in- 
ternational trade  is  based  upon  the  relative  advantages  of  produc- 
tion and  not  upon  absolute  advantages.  In  looking  at  relative  ad- 
vantages the  things  compared  are  not  merely  the  same  things  in 
different  countries  but  also  different  things  in  the  same  coun- 
try. The  American  producer  of  steel,  under  the  conditions  stated, 
would  make  a  higher  rate  of  profits  than  the  English  producer; 
but  the  American  producer  of  wheat  would  make  still  greater 
profits.  Manifestly,  American  capital  and  labor  would,  under 
such  circumstances,  be  set  to  producing  wheat  for  export  rather 
than  steel.  But  this  great  principle  of  international  trade  is  the  same 
principle  as  that  announced  at  the  opening  of  this  section,  that  the  ad- 
vantage of  international  trade  is  that  resulting  from  international  di- 
vision of  labor,  each  nation  doing  what  nature  has  best  fitted  it  to  do. 

112.  ECONOMIC  EFFECTS  OF  PROTECTIVE  TARIFFS.  A 
protective  tariff  is  a  tax  levied  on  imported  goods  in  order  to  de- 
stroy  or   lessen    competition   between   home    producers    and   foreign 


180  ELEMENTS    OF    ECONOMICS 

producers.  If  the  rate  is  high  enough  to  shut  out  imports  altogether, 
home  producers  could  raise  their  prices  high  enough  to  yield  the  rate 
of  profits  prevailing  in  other  industries,  and  if  a  monopoly  should 
be  formed  prices  would  go  even  higher.  If  the  rate  is  not  high 
enough  to  exclude  foreign  goods,  the  importer  will  add  the  tariff 
to  the  price,  and  the  increased  price,  if  high  enough,  will  invite 
capital  into  the  protected  industry.  Thus  in  either  case  the  in- 
creased price  will  make  the  protected  industry  profitable  and  it  will 
be  developed  if  the  country  has  any  aptitude  for  it. 

Now  the  most  vital  point  in  the  whole  controversy  is  the  kind 
of  industry  that  a  protective  tariff  will  develop.  Will  it  develop  in- 
dustries that  naturally  yield  the  most  profits  or  those  that  yield 
the  least  profits?  Will  it,  in  other  words,  develop  the  industries  for 
which  nature  has  best  fitted  the  country,  or  will  it  develop  industries 
in  which  the  country  has  least  natural  advantages?  The  whole 
controversy  over  protection  hinges  upon  this  point,  and  if  the  con- 
troversy is  ever  ended  it  will  be  when  this  point  is  settled  one  way 
or  the  other.  The  disputes  over  the  effects  of  the  tariff  on  wages 
and  upon  industry  generally  all  depend  upon  this  one  great  question. 

On  this  point  the  opponents  of  the  protective  principle  claim 
that  it  is  the  industries  that  are  naturally  among  the  less  profitable 
that  are  protected,  that  the  tariff  is  to  enable  the  less  profitable  in- 
dustries of  the  country  to  make  as  much  as  the  most  profitable,  and 
not  enable  those  making  the  highest  profits  to  make  still  higher 
profits.  Protectionist  writers  seem  not  to  have  considered  this 
point  at  all,  except  in  the  case  of  the  "young  industries"  argument, 
to  be  dealt  with  later.  If  this  assertion  of  the  anti-protectionists 
is  true,  that  the  tariff  develops  the  less  profitable  industries,  then 
it  follows  that  a  protective  tariff  diverts  capital  from  its  natural 
channels  and  makes  the  nation  poorer,  unless  the  tariff  creates  new 
capital  and  thus  increases  the  total  amount  of  the  capital  and  in- 
dustry in  that  country.    This  possible  result  we  will  consider  in  a  mo- 


ELEMENTS   OF   ECONOMICS  181 

ment. 

It  may  be  urged  that  the  tariff  makes  the  protected  industries 
as  profitable  as  other  industries.  So  it  does  make  the  protected  in- 
dustries as  profitable  to  those  engaged  in  them,  but  not  to  the  coun- 
try as  a  whole.  The  enhanced  profits  of  the  protected  industries 
come  from  the  increased  prices,  and  the  increase  in  prices  lessens 
the  profits  of  all  other  industries.  If  a  tariff  increases  the  price  of 
steel,  all  who  use  steel  pay  the  increased  price  and  their  profits  are 
thereby  lessened.  Hence,  it  remains  true  that  the  country  is  devel- 
oping unprofitable  industries  and  is  poorer  because  of  the  protective 
tariff,  unless  the  tariff  creates  new  capital  rather  than  diverts  it 
from  the  more  to  the  less  profitable  industries. 

The  capital  of  a  country  can  be  increased  only  by  increased  sav- 
ing or  by  importing  it  from  foreign  countries.  If  the  whole  range 
of  industries  becomes  less  profitable  by  developing  industries  for 
which  the  country  is  not  well  fitted  by  nature,  savings  would  not 
increase,  but  decrease,  unless  the  tariff  should  have  the  curious 
result  of  compelling  people  to  work  harder  or  live  more  sparingly 
in  order  to  save  more  capital.  It  is  needless  to  say  that  no  protec- 
tionist would  claim  such  a  result.  Nor  would  foreign  capital  flow  in 
more  than  ordinarily  because  of  the  tariff,  if  industry  becomes  less 
profitable.  And  in  fact  the  foreign  capital  in  this  country  seeks 
the  non-protected  industries,  where  a  change  of  political  parties  at 
Washington  cannot  wipe  out  profits  by  a  change  in  the  tariff.  It 
may  seem  obvious  that  when  mills  and  factories  spring  up  because 
of  the  tariff,  the  tariff  has  increased  the  total  amount  of  capital 
and  industry  in  the  country.  We  can  see  these  additional  mills  and 
factories  but  we  can  neither  see  nor  estimate  the  capital  that  would 
have  been  in  the  more  profitable  industries  had  the  tariff  not  di- 
verted it  from  its  natural  channels.  On  the  whole,  if  the  view  of 
the  anti-protectionists,  that  a  protective  tariff  develops  the  indus- 
tries for  which  the  country  is  not  best  fitted  by  nature,  is  true,  it 


182  ELEMENTS    OF    ECONOMICS 

follows  that  the  total  amount  of  capital  in  the  country  is  less  than 
it  would  have  been  without  the  tariff  and  that  industry  as  a  whole 
is  less  productive  and  the  country  is  made  poorer  and  not  richer.  If 
this  is  the  true  result  of  protective  tariffs  it  is  high  time  that  the 
people  of  this  country  should  know  it,  that  we  as  a  nation  may 
cease  to  waste  our  energies  by  developing  unprofitable  industries. 

113.  THE  YOUNG  INDUSTRIES  ARGUMENT.  In  the  last 
topic  we  have  been  considering  protection  as  a  permanent  thin^. 
Economists  and  statesmen  are  generally  agreed  that  it  may  be  wise 
to  protect  certain  industries  temporarily.  This  is  known  as  the 
theory  of  protection  to  young  industries.  Stated  briefly,  the  theory 
is  that  if  a  country  ,has  natural  facilities  for  certain  industries,  but 
artificial  hindrances  prevent  their  development,  protection  should 
be  extended  to  those  industries  until  they  are  able  to  prosper  with- 
out protection.  The  artificial  obstructions  might  be  lack  of  skilled 
workers,  lack  of  trade  connections,  competition  of  old  and  well  es-- 
tablished  industries  in  other  countries,  and  various  temporary  hin- 
drances incident  to  the  starting  ^of  an  industry.  The  temporary  pro- 
tection of  such  industries  might  be  compared  with  draining  a 
swamp.  It  might  be  an  expense  to  undertake  it,  but  if  the  land  is 
rich  it  will  more  than  repay  the  cost;  and  if  the  industry  developed 
is  one  naturally  profitable,  it  will  repay  us  for  the  high  prices  tem- 
porarily endured.  If  the  industry  is  naturally  profitable,  competi- 
tion among  home  producers  will  bring  down  prices  when  the  in- 
dustry is  permanently  established,  unless  a  monopoly  is  formed. 

If  the  policy  of  protection  to  young  industries  is  to  be  applied, 
it  should  be  done  judiciously.  Great  care  should  be  used  in  selecting 
the  industries  to  be  protected  and  aid  should  be  extended  to  none 
except  those  having  natural  facilities  in  their  favor.  Then  the  pro- 
tection should  be  withdrawn  gradually  when  the  industries  are  able 
to  stand  alone.  Our  method  of  applying  protection  has  been  far  dif- 
ferent.    Aid  has  been  extended  indiscriminately  to  all  sorts  of  in- 


ELEMENTS    OF    ECONOMICS  183 

dustries,  and  aid  once  given  has  not  been  withdrawn.  The  failure  to 
withdraw  protection  after  a  reasonable  time  has  been  due  partly  to 
the  influence  of  the  "vested  interests"  in  political  affairs  and  partly 
to  the  belief  in  permanent  protection. 

114.  THE  TARIFF  AND  WAGES.  Protectionists  argue  that 
American  labor  should  be  protected  against  the  cheap  labor  of  other 
countries.  The  argument  assumes  that  American  producers 
cannot  compete  with  foreign  producers  because  of  higher  wages 
in  this  country.  But  since  the  non-protected  industries  in  this  coun- 
try pay  the  same  rates  of  wages,  for  the  same  grade  of  labor,  as  the 
protected  industries  pay,  the  reason  why  the  industry  asking  protec- 
tion cannot  compete  with  foreign  producers  is  not  high  wages  but  the 
lack  of  natural  facilities.  The  non-protected  industries  can  pay 
higher  wages  than  their  foreign  competitors  because  those  indus- 
tries are  naturally  profitable  at  prevailing  world  prices. 

Moreover,  the  effect  of  protective  tariffs  on  wages  cannot  be 
considered  apart  from  the  general  effect  of  such  tariffs  upon  indus- 
try. We  shall  learn  in  a  subsequent  chapter  that  wages  depend  upon 
the  relation  between  supply  of  and  demand  for  labor,  and  the  pro- 
ductivity of  industry.  The  greater  the  productivity,  demand  and 
supply  remaining  the  same,  the  higher  the  wages;  and  a  great  de- 
mand for  labor,  coming  from  the  owners  of  capital,  with  a  shortage 
in  supply,  makes  wages  high.  Now,  if  a  protective  tariff  does  not 
increase  capital  or  make  it  more  productive,  but  has  the  opposite 
effect,  a  protective  tariff  does  not  increase  wages  but  decreases 
wages. 

115.  OTHER  ARGUMENTS.  There  are  several  other  arguments 
for  or  against  a  protective  tariff,  two  of  which  find  frequent  ex- 
pression in  current  literature.  One  of  these  arguments  relates  to 
the  diversification  of  industries  which  a  protective  tariff  will  bring 
about.  With  many  different  kinds  of  industries  the  people  of  a 
country  are  able  to  utilize  their  different  tastes   and   talents,   and 


184  ELEMENTS    OF    ECONOMICS 

the  mational  life  will  be  fuller  and  richer.  In  a  purely  agricultural 
country,  for  example,  people  are  backward  and  lack  the  opportuni- 
ties that  come  with  a  denser  population  and  the  existence  of  large 
cities.  But  it  is  urged  on  the  other  hand  that  if  there  is  any  eco- 
nomic advantage  in  such  diversification  of  industries,  the  tariff  is  not 
needed  to  develop  them,  since  the  natural  advantages  would  result  in 
greater  profits,  which  would  be  sufficient  incentive  for  starting  new 
industries. 

The  home  market  argument  also  still  persists  in  the  popular 
press.  This  argument  assumes  that  to  transport  goods  long  dis- 
tances is  an  economic  waste  and  that  a  market  at  home  is  better 
and  more  secure  than  a  market  abroad.  But  if  it  did  not  pay  to 
transport  goods  long  distances  they  certainly  would  not  be  trans- 
ported. Moreover,  a  home  market  is  no  more  secure  than  a  foreign 
market  except  in  case  of  war,  for  the  demands  of  other  people  are 
as  persistent  as  the  demands  of  the  American  people. 

116.  THE  PRESENT  TARIFF.  The  existing  tariff,  passed  in 
1913,  is  the  first  since  the  Civil  War  to  revise  rates  downward.  The 
average  rate  was  lowered  about  twenty-five  per  cent.  But  the  full 
significance  of  the  new  tariff  is  not  revealed  by  the  change  in  the 
average  rate.  About  one  hundred  articles,  largely  necessities,  were 
put  on  the  free  list,  about  seventy  were  taken  from  the  free  list,  in- 
cluding many  luxuries,  and  other  luxuries  were  taxed  at  a  higher 
rate.  On  the  free  list  are  such  articles  as  meats,  cattle,  wool,  flour, 
potatoes,  boots  and  shoes,  lumber,  and  sugar  after  1916.  Rates 
were  lowered  on  woolen  from  94  per  cent  to  35  per  cent;  linen,  from 
52  per  cent  to  35  per  cent;  ready  made  clothing,  79  per  cent  to  35 
per  cent;  cotton,  50  per  cent  to  30  per  cent.  Briefly  stated,  the  new 
tariff  puts  several  important  items  on  the  free  list,  lowers  the  rates 
on  other  articles  of  necessity  or  where  monopoly  existed,  and  in- 
cieased  the  rates  on  luxuries. 


ELEMENTS    OF    ECONOMICS  185 

CHAPTER  XIII. 
Wages. 

117.  DISTRIBUTION.  We  have  considered  the  three  fields  of 
economics,  Consumption,  Production,  and  Exchange.  We  now  turn 
to  the  fourth  field,  Distribution,  which  treats  of  the  laws  of  wages, 
interest,  profits,  and  rent.  There  are  two  phases  of  distribution, 
one  dealing  with  the  factors  determining  the  total  amount  going  to 
each  of  the  four  shares  and  the  other  dealing  with  rates  of  wages, 
interest  and  profits  and  the  amount  of  rent  on  an  individual  piece 
of  land.  The  latter  phase  of  the  subject  is  the  most  practical  one 
and  to  that  alone  we  will  direct  our  attention.  What  we  are  chiefly 
concerned  with  is  the  problem  of  human  welfare,  namely,  what  each 
individual  worker  in  society  gets  for  his  work. 

The  problem  is  a  very  complex  one,  since  there  are  several  fac- 
tors involved,  some  are  working  in  one  direction  and  some  in  an- 
other, and  a  certain  indefiniteness  attaches  to  these  forces  because 
of  the  human  element.  The  laws  of  production  partake  of  the  defi- 
niteness  of  physical  laws,  but  the  laws  of  wages  and  of  interest 
and  profits  are  much  more  indefinite.  This  does  not  mean  that  these 
laws  are  not  known,  but  it  means  that  they  cannot  be  stated  in 
quantitive  terms.  We  know,  for  example,  what  forces  make  wages 
low,  but  we  cannot  tell  how  low  those  forces  may  send  wages. 

The  forces  entering  into  the  distribution  are  those  of  demand, 
supply,  productivity,  competition  and  the  standard  of  living.  These 
are  the  forces  we  must  keep  in  mind. 

118.  ANNUAL  INCOME  AND  ANNUAL  PRODUCT.  It  will  be 
helpful  to  make  a  distinction  between  the  annual  income  and  the 
annual  product.  These  are  two  very  different  things,  though  closely 
connected.  The  annual  income  includes  the  annual  product  and  in  ad- 
dition the  enjoyment  of  all  consumers'  goods  produced  in  past 
years.  The  enjoyment  of  the  houses  we  live  in  is  as  much  a  part  of 
our  annual  income  as  the  enjoyment  of  the  clothes  we  wear.     The 


186  ELEMENTS    OF    ECONOMICS 

annual  income,  especially  in  old  and  rich  countries,  is  much  larger 
than  the  annual  product.  It  is  with  the  annual  product  that  distri- 
bution is  concerned. 

119.  MONEY  WAGES  AND  REAL  WAGES.  We  must  also 
distinguish  between  money  wages  and  real  wages.  Under  certain 
conditions  money  wages  might  be  high  while  real  wages  are  low  and 
money  wages  might  be  low  while  real  wages  were  high.  It  depends 
upon  prices.  If  prices  are  very  high,  high  money  wages,  that  is, 
high  as  compared  with  other  countries  or  other  times,  might  npt 
enable  workers  to  live  in  decency.  The  really  important  question  is 
not  how  many  dollars  a  man  gets  for  a  day's  work,  but  how  many 
of  the  necessities  and  comforts  can  a  man  secure  with  a  day's  labor. 

In  the  mining  camps  of  the  West  in  the  early  days  money  wages 
were  high,  as  compared  with  money  wages  in  the  East.  But  owing 
to  the  cost  of  transportation  goods  were  very  high  in  the  mining 
camps,  and  the  real  wages  were  not  much  higher  in  the  West  than 
in  the  East.  During  the  Middle  Ages  money  wages  were  exceeding- 
ly low,  as  compared  with  present  rates.  In  the  time  of  Edward  I. 
skilled  workmen  in  London  received  about  eight  or  ten  cents  a  day, 
which  seems  to  us  an  impossible  condition.  But  when  we  read  in  an 
ordinance  of  the  City  of  London  that  master  craftsmen  shall  receive 
four  pence  a  day  or  three  half-pence  a  day  and  board  at  the  em- 
ployer's table,  the  situation  looks  entirely  different.  These  illus- 
trations serve  to  show  the  necessity  of  distinguishing  between  money 
wages  and  real  wages.  It  is  with  real  wages  that  distribution  is 
concerned. 

120.  DEMAND  FOR  LABOR.  Demand  for  labor  comes  from 
capital.  In  modern  industry  very  little  labor  is  or  can  be  used  apart 
from  capital.  The  amount  of  labor  demanded,  therefore,  depends 
upon  the  amount  of  capital,  providing  capitalists  do  not  miscalcu- 
late and  c;reate  more  capital  along  some  lines  than  the  extent  of  the 
market  will  warrant.    Demand  may  vary  to  some  extent  owing  to  the 


ELEMENTS   OF    ECONOMICS  187 

more  or  less  intensive  use  of  capital.  If  there  is  sufficient  demand 
for  its  products,  a  factory  may  run  night  and  day,  or  if  there  is  a 
slackening  demand,  it  may  run  on  short  time  and  with  only  a  part 
of  its  labor  force.  Stating  all  these  facts  briefly,  we  may  say  that 
the  amount  of  labor  demanded  depends  upon  the  amount  of  capital 
and  the   intensity  of  its  use. 

Along  with  demand  is  the  force  of  competition.  If  the  amount 
of  capital  increases  and  the  number  of  laborers  remains  the  same, 
there  will  be  active  competition  to  secure  laborers,  and  wages  will 
rise.  If  a  man  has  a  factory  he  does  not  desire  to  see  it  standing 
idle  and,  as  demand  for  labor  tends  to  exceed  the  supply,  he  will  of- 
fer higher  wages  than  the  usual  rate  in  order  to  tempt  laborers  to 
leave  other  employers.  This  is  the  effect  of  an  increase  of  capital 
in  case  there  is  no  considerable  body  of  unemployed.  If  there  is  a 
large  number  out  of  work,  there  might  be  a  considerable  increase  of 
capital  before  wages  would  begin  to  rise. 

The  height  to  which  wages  would  rise  depends  upon  various 
conditions,  such  as  the  productivity  of  industry  and  the  willingness 
of  the  -capitalist  class  to  continue  to  accumulate  capital  and  reduce 
their  profits. 

Under  modern  conditions,  demand  for  labor  is  demand  for  cer- 
tain grades  of  labor  in  certain  proportions.  Machinery  demands 
labor  of  different  kinds  and  of  varying  degrees  of  skill.  In  a  shoe 
factory,  for  example,  there  is  the  head  manager,  a  number  of  fore- 
men, skilled  workers  of  various  kinds,  and  unskilled  laborers  to  do 
various  kinds  of  work,  such  as  trucking  and  loading  and  unloading 
freight.  Moreover,  the  demand  for  labor  is  demand  for  certain  kinds 
of  labor  in  certain  proportions,  depending  upon  the  nature  of  the  in- 
struments of  production.  A  machine  requires  about  so  much  at- 
tention, the  amount  depending  upon  the  character  of  the  machine. 
More  than  this  number  of  men  in  connection  with  the  machine  would 
be  a  waste  of  labor.    The  relative  number  demanded  of  the  different 


188  ELEMENTS    OF    ECONOMICS 

grades  of  labor  is  not  absolutely  fixed  at  any  given  time,  especially 
of  the  unskilled  laborers.  If  wages  are  low,  a  few  more  might  be 
used  in  keeping  things  a  little  neater  and  cleaner,  or  to  do  certain 
things  that  might  be  left  undone  if  wages  were  high.  But  the  limits 
of  such  variation  in  the  relative  number  demanded  are  very  narrow. 
Because  of  these  facts  demand  for  labor  is  often  represented 
as  a  pyramid.  The  base  of  the  pyramid  is  composed  of  a  huge  layer 
of  unskilled  labor.  This  labor  is  found  in  nearly  all  industries,  but 
it  practically  forms  one  layer  of  the  pyramid,  since  it  can  readily 
shift  from  one  industry  to  another,  and  consequently  the  rates  of 
wages  of  unskilled  labor  of  different  kinds  tend  strongly  towards  uni- 
formity. Just  above  the  unskilled  workers  are  several  thin  layers  of 
semi-skilled  workmen.  These  include  laborers  without  technical  knowl- 
edge but  with  valuable  experience  that  greatly  increases  efficiency. 
Then  come  the  real  skilled  tradesmen  who  have  a  technical  knowledge 
of  their  trade,  gained  either  from  study  or  from  apprenticeship,  or 
both.  In  this  class  might  be  placed  the  workers  in  the  building 
trades,  iron  moulders,  machinists,  office  help,  including  stenogra- 
phers, typewriters  and  bookkeepers,  and  a  great  number  who  com- 
bine manual  labor  with  a  considerable  amount  of  mental  work. 
Above  these  numerous  layers  come  the  real  brain  workers,  also  in  va- 
rious layers,  with  the  great  business  managers  with  high  salaries 
at  the  top. 

121.  THE  SUPPLY  OF  LABOR.  The  supply  of  labor  may  not 
correspond  to  this  pyramid  of  demand;  in  fact  there  has  for  genera- 
tions been  a  strong  tendency  towards  an  oversupply  of  workers  at 
the  base  of  the  pyramid  and  a  scarcity  at  the  top.  In  the  first  place 
the  labor  supply  is  not  readily  adjusted  to  the  demand  as  in  the  case  of 
an  ordinary  commodity.  If  there  is  an  oversupply  of  an  ordinary 
commodity,  production  is  cut  off.  But  the  number  of  laborers  chang- 
es slowly,  and  from  the  law  of  Malthus  may  tend  to  increase  faster 
than  capital.    Moreover,  since  labor  is  like  a  perishable  commodity,  a 


ELEMENTS    OF    ECONOMICS  189 

decrease  in  demand  for  labor  temporarily  increases  the  supply  seek- 
ing employment.  When  there  is  an  oversupply  of  labor,  competition 
among  laborers  forces  wages  down.  If  all  laborers  had  to  live  wholly 
on  their  wages,  that  is,  if  charity  did  not  supplement  wages,  the  mini- 
mum of  subsistence  would  set  the  lower  limit  of  wages.  But  since 
charity  is  always  supplementing  starvation  wages,  there  is  no  defi- 
nite limit  to  the  fall  in  wages  in  the  presence  of  an  oversupply. 

The  reason  why  the  oversupply  is  usually  found  in  the  ranks  of 
the  unskilled  laborers  and  never  at  the  top  of  the  pyramid  is  because 
there  is  not  free  competition  among  laborers.  Over  short  periods  of 
time  there  is  no  direct  competition  between  unskilled  laborers  and 
those  above  them.  That  is,  unskilled  laborers  cannot  compete  for  the 
positions  of  the  skilled  or  semi-skilled  workers  though  the  skilled 
workers  may  sink  into  the  ranks  of  the  unskilled  and  compete  with 
them.  Over  long  periods  of  time  there  has  not  been  much  competition 
between  the  unskilled  and  the  skilled.  The  causes  for  this  are  various. 
The  lower  classes  often  do  not  possess  the  energy  and  intelligence  to 
push  themselves  up  and  more  often  they  do  not  have  the  opportunity, 
partly  because  poverty  compels  them  to  put  their  children  to  work  too 
young,  partly  because  the  trade  unions  limit  the  number  of  appren- 
tices that  can  enter  their  trade,  and  partly  because  the  public  schools 
do  not  undertake  to  fit  pupils  to  enter  the  skilled  trades,  except  in 
the  commercial  subjects. 

There  is  considerable  competition,  over  long  periods  of  time, 
among  the  skilled  workers.  These  classes  have  more  intelligence 
and  more  opportunities  than  the  unskilled  workers,  and  they  can 
prepare  their  children  for  the  different  trades.  If  wages  tend  to 
fall  in  any  trade,  some  parents  will  prepare  their  children  for  other 
trades  that  pay  higher  wages.  Hence  we  find  a  fair  degree  of  uni- 
formity of  wages  among  the  skilled  workers.  Roughly  speaking, 
the  wages  of  those  below  the  brain  workers  fall  into  two  sharply 
defined  groups.     The  better  classes  of  unskilled  laborers  in  the  United 


190  ELEMENTS    OF    ECONOMICS 

States  receive  about  a  dollar  and  a  half  a  day,  while  skilled  workers 
receive  four  or  five  dollars  a  day  and  sometimes  more. 

There  is  little  competition  between  the  real  brain  workers  and 
those  below  them.  Nature  seems  to  have  been  niggardly  in  bestow- 
ing real  mental-  power  of  the  higher  order.  Consequently,  we  find 
£L  few  far  above  the  rest  receiving  princely  salaries  of  $50,000  a 
year  or  more,  while  at  the  bottom  several  millions  are  toiling  for  a 
pittance  of  four  hundred  to  five  hundred  dollars  a  year.  Mr.  J.  A. 
Parks  of  the  Massachusetts  Industrial  Accident  Board  recently 
.asserted  that  statistics  show  that  19,000,000  working  people  in  the 
United  States  earn  less  than  $500  a  year.  This  doubtless  includes 
women  and  children  who  are  wage  earners. 

122.  THE  STANDARD  OF  LIVING.  The  standard  of  living 
affects  wages  both  directly  and  indirectly.  It  affects  wages  indi- 
rectly by  affecting  the  efficiency  of  laborers.  If  a  high  standard 
of  living  is  maintained  it  is  done  to  a  large  extent  by  limiting  the 
increase  in  population.  Young  men  who  are  ambitious  to  get  on  well 
in  the  world  and  bring  up  a  family  in  a  proper  way  usually  delay 
marriage  until  their  incomes  are  large  enough  to  support  a  family 
according  to  their  ideals,  and  small  families  is  the  result.  Among 
the  upper  classes  of  laborers  this  is  the  prevailing  condition,  while 
among  the  lower  grades  of  labor  early  marriages  and  larger  families 
prevail. 

The  standard  of  living  has  several  direct  effects  upon  wages. 
Sentiments  of  humanity  may  to  some  extent  check  the  downward 
tendency  of  wages  of  the  lower  classes,  either  because  employers 
themselves  have  some  conscience  or  because  public  sentiment  shames 
them  into  having  some  regard  for  the  welfare  of  their  employees. 
Within  recent  years  public  investigations  have  revealed  the  fact  that 
laborers  were  not  getting  a  living  wage  and  sharp  criticisms  of 
employers  by  the  press  and  the  public  have  caused  a  rise  in  wages. 
Some   states  have   enacted   minimum  wage   laws,   relying   on   public 


ELEMENTS    OF    ECONOMICS  191 

sentiment  for  their  enforcement,  the  only  punishment  for  not  pay- 
ing the  rate  of  wages  set  by  the  board  being  the  publication  in  the 
newspapers  of  the  names  of  such  employers.  Economic  motives  may 
help  to  keep  up  wages  a  little,  since  employers  like  to  see  their 
employees  contented. 

But  all  these  forces  do  not  seem  able  to  keep  wages  of  the 
great  masses  of  the  lower  classes  of  labor  above  the  standard  of 
decency.  If  any  considerable  number  of  employers  disregard  senti- 
ments of  humanity  and  force  wages  down  because  an  oversupply 
of  labor  enables  them  to  do  so,  their  rivals  must  lower  wages  or 
be  driven  out  of  business.  Thus  a  small  portion  of  the  employers 
who  are  greedy  for  large  profits  may  compel  more  humane  em- 
ployers to  violate  the  promptings  of  their  better  nature  which  would 
induce  them  to  give  the  square  deal.  And  it  should  be  clearly  under- 
stood that  there  is  no  economic  necessity  for  paying  less  than  a 
living  wage  in  these  days  of  machine  production  if  all  employers 
were  willing  to  give  their  employees  a  square  deal.  This  would 
not  reduce  their  profits  below  a  fair  rate,  because  if  all  producers 
employing  lower  grades  of  labor  paid  higher  wages,  they  could  partly 
compensate  themselves  by  raising  prices,  except  where  foreign  com- 
petition prevented.  A  part  of  the  increased  wages  of  the  lower 
grades  of  labor  might  come  out  of  the  wages  of  the  skilled  workers, 
in  case  foreign  competition  threatened  to  reduce  profits  below  a 
fair  rate,  for  all  are  workers  for  the  common  welfare  and  there 
is  no  moral  justification  for  one  class  of  labor  starving  while  an- 
other class  can  live  in  luxury. 

123.  PRODUCTIVITY.  A  fourth  factor  determining  wages  is 
productivity.  This  may  mean  the  average  productivity  of  industry 
per  unit  of  labor,  or  the  productivity  of  one  laborer  as  compared 
with  another,  or  the  marginal  productivity  of  labor.  Let  us  con- 
sider these  three  phases  of  productivity  in  order.  If  the  produc- 
tivity of  industry  is  low  wages  must  be  low,  for  the  simple  reason 
that  if  little  is  produced  there  will  be  little  to  divide  among  the 


192  ELEMENTS    OF    ECONOMICS 

workers.  If  productivity  is  high  the  rate  of  wages  may  or  may 
not  be  high,  owing  to  the  relation  between  demand  for  and  supply 
of  labor.  If  demand  for  labor  is  strong  in  proportion  to  supply,  high 
productivity  will  cause  wages  to  be  high,  because  of  the  force  of 
competition  among  employers  for  laborers.  But  if  there  is  an  over- 
supply  of  labor,  high  productivity  will  not  make  wages  high,  because 
of  competition  among  laborers  for  work.  Hence,  we  may  have  the 
strange  situation  of  laborers  starving  in  the  midst  of  plenty. 

Differences  in  efficiency  among  individuals  is  a  complex  prob- 
lem and  not  easy  to  analyze.  Differences  in  the  efficiency,  honesty 
and  reliability  of  individuals  doing  the  same  kind  of  work  is  fairly 
easy  to  estimate,  especially  among  workers  below  the  intellectual 
groups.  These  differences  help  to  account  for  the  differences  in 
wages  of  workers  in  the  same  class  or  trade.  But  trade  union  rules 
often  prevent  the  natural  workings  of  this  principle,  since  the 
unions  demand  a  uniform  wage.  This  is  true  both  of  piece  work 
and  time  work.  Differences  in  efficiency  are  more  marked  as  between 
workers  in  different  grades,  but  more  difficult  to  estimate.  There 
is  no  comparison,  for  example,  between  the  earning  power  of  an 
efficient  railway  president  and  an  efficient  section  hand.  A  good 
section  hand  might  be  worth  two  or  three  times  as  much  as  a 
poor  one;  a  capable  railway  president  would  increase  the  earnings 
of  the  company  possibly  by  millions  of  dollars  yearly,  while  an 
incapable  president  would  ruin  the  company.  To  state  this  in  gen- 
eral terms,  the  differences  in  earning  power  of  brain  workers  are 
immense  while  the  differences  in  the  earning  power  of  manual  work- 
ers are  comparatively  small.  Hence,  wages  of  the  brain  workers  may 
be  very  high.  Usually  there  is  a  scarcity  of  great  ability  and  it 
can  command  such  salaries  only  when  there  is  a  scarcity.  If,  for 
example,  railway  presidents  of  the  first  order  of  ability  were  as 
plentiful  in  proportion  to  the  demand  as  section  hands  are  in  pro- 
portion to  the  demand,  there  is  no  economic  reason  why  the  wages 
of  one  group  would  be  any  greater  than  the  wages   of  the   other. 


ELEMENTS    OF    ECONOMICS  193 

The  more  efficient  workers  can  reap  the  benefit  of  their  superior 
efficiency  only  in  case  of  a  scarcity  of  that  kind  of  labor.  To  put 
it  briefly,  laborers  of  great  productive  power  secure  high  wages 
because  of  efficiency  and  scarcity. 

Marginal  productivity  is  a  rather  illusive  idea.  Its  meaning 
may  best  be  seen  by  an  illustration.  Suppose  a  factory  employs  a 
thousand  workers,  and  that  there  are  just  enough  to  keep  the 
machinery  all  running  in  good  condition.  If,  say,  ten  workers  are 
added,  with  no  increase  in  machinery,  there  may  be  a  slight  increase 
in  product,  but  the  amount  of  increase  per  man  will  evidently  be 
much  smaller  than  the  average  product  of  all  the  men  at  work. 
This  is  really  another  way  of  looking  at  our  familiar  law  of  pro- 
duction, that  the  three  factors  must  be  used  in  the  proper  propor- 
tions or  diminishing  returns  result.  Thus  an  oversupply  of  labor 
in  any  group  brings  this  law  into  play,  and  wages  fall  because 
marginal  productivity  falls.  Before  taking  on  more  men  the  em- 
ployer estimates  what  they  will  be  worth  to  him;  and  the  pay  of 
the  marginal  men,  in  the  same  kind  of  work,  sets  the  pay  for  all 
in  the  group,  because  competition  forces  them  to  accept  the  rate 
offered.  Thus  from  a  different  angle  we  reach  the  same  con- 
clusion that  where  there  is  an  oversupply  of  labor  of  any  class  the 
workers  may  starve  in  the  midst  of  abundance  of  wealth. 


194  ELEMENTS  OF  ECONOMICS 


CHAPTER  XIV. 
Rent. 

124.  NATURE  OF  RENT.  Economic  rent  is  a  surplus  gain 
from  a  natural  agent  above  the  cost  of  production  on  the  margin  of 
cultivation.  "The  "marginal"  lands  cultivated  would  be  the  poorest 
lands,  either  the  least  fertile  or  those  most  distant  from  market. 
The  marginal  producer  is  the  producer  making  the  least  profits, 
which  would  be  only  enough  to  pay  wages  and  interest  on  capital, 
not  counting  the  land  as  capital.     This  is  the  cost  on  the  margin. 

The  marginal  producers  would  be  able  to  make  no  more  than 
enough  to  pay  wages  and  interest  because  of  industrial  competition. 
If  profits  on  the  poorest  land  in  cultivation  were  above  the  normal 
rate  in  other  lines  of  business,  capital  would  flow  into  agriculture  and 
increase  the  quantity  of  the  products  until  the  fall  in  price  made 
profits  on  the  margin  of  cultivation  equal  to  profits  in  other  lines 
of  business. 

Lands  nearer  market  or  more  fertile  yield  a  surplus  above  cost 
of  production  on  the  margin  because  of  the  greater  fertility  or  smaller 
cost  of  getting  products  to  market,  and  because  all  producers  of  the 
same  quality  sell  in  the  same  market  at  the  same  price.  Take  two 
tracts  of  land  of  equal  fertility,  one  lying  near  a  great  market,  say 
Chicago,  and  the  other  lying  in  North  Dakota.  The  same  expendi- 
ture per  acre  in  labor  and  capital  would  yield  in  both  cases  the  same 
quantity  of  product;  but  if  the  products  of  both  farms  sell  in  the 
Chicago  market,  the  farm  near  Chicago  has  the  advantage  over  the 
farm  in  North  Dakota,  for  the  farmer  near  Chicago  would  get  higher 
prices  than  the  farmer  in  Dakota.  In  this  case  the  differential 
gain  or  surplus  would  equal  the  cost  of  transporting  the  crop  from 
North  Dakota  to  Chicago.  If  two  farms  are  equally  distant  from 
market,  the  surplus  would  result  from  greater  fertility. 

Why  are  not  the  total  net  profits  from  the  land  considered  as 
interest  on  capital  invested?     If  a  man  should  buy  a  farm  and  then 


ELEMENTS  OF  ECONOMICS  195 

rent  it  to  a  tenant,  why  is  not  this  "rent"  money  merely  interest  on 
money  paid  for  the  farm?  If  population  and  demand  for  farm 
products  remained  stationary  after  the  purchase  of  the  farm  there 
would  be  no  confusion  in  calling  the  income  from  it  interest.  But  if 
population  should  increase  we  have  a  different  situation.  Suppose 
the  population  of  the  country  or  of  the  world  should  increase.  The 
increased  cost  of  production  on  the  margin  would  raise  the  prices  of 
farm  products,  and  the  increase  in  prices  would  increase  the  rental 
value  of  the  land.  Suppose  a  man  buys  a  farm  for  $10,000.  If  the 
prevailing  rate  of  interest  is,  say  5  per  cent,  the  farm  will  rent  for 
$500  a  year.  If  prices  double,  the  rental  value  would  be  $1000  a 
year,  supposing  no  change  in  the  general  rate  of  interest.  Thirty 
years  ago  land  in  eastern  Nebraska  was  selling  for  about  $20  an 
acre,  but  now  the  same  land  sells  for  $100  an  acre;  hence  if  a  man 
bought  land  in  Nebraska  thirty  years  ago  he  would  be  receiving  five 
times  the  prevailing  rate  of  interest  on  his  investment,  assuming  no 
change  in  rates  of  interest.  But  in  fact  the  general  rate  of  interest 
has  fallen  one  or  two  per  cent  during  the  last  thirty  years.  Thus  it 
will  be  seen  that  the  income  from  land  and  the  income  from  capital 
invested  in  other  industries  are  governed  by  different  laws. 

125.  URBAN  RENTS.  Economic  urban  rent  means  the  same  as 
agricultural  rent,  it  is  the  surplus  above  the  marginal  gains  from  a 
natural  agent.  We  must,  as  in  agricultural  rent,  exclude  capital 
such  as  buildings  and  improvements.  Rent  is  the  return  from  the 
land  only.  In  ordinary  usage  we  may  speak  of  renting  a  house;  but 
in  economics  we  must  distinguish  between  the  land,  which  is  a  fixed 
quantity,  and  capital  which  may  be  increased  at  will.  As  population 
increases  in  a  city  it  is  not  the  value  of  the  buildings  that  increases 
but  the  value  of  the  land. 

The  rent  of  business  establishments  obeys  the  same  laws  that 
govern  agricultural  rents.  Agricultural  rent  is  governed  by  the  fer- 
tility of  the  soil  and  location.     Urban  rent  is  governed  by  location 


196  ELEMENTS  OF  ECONOMICS 

alone.  Take  for  example,  the  "Loop"  district  of  Chicago  or  the 
down  town  district  of  New  York  City.  A  business  establishment  in 
either  of  these  localities  will  rent  for  many  times  as  much  as  it 
will  in  the  outskirts  of  the  city,  because  of  the  advantages  of  the 
location.  The  cost  of  the  building  would  be  the  same  whether  erected 
in  the  down  town  section  or  on  the  edge  of  the  city.  It  is  perfectly 
clear,  therefore,  that  the  land  is  the  essential  element  that  gives  rise 
to  differences  in  the  earning  power.  In  residential  districts  property 
rents  for  more  or  less  according  to  location. 

126.  RENT  NOT  A  CAUSE  OF  HIGH  PRICES.  High  rents  do 
not  cause  high  prices.  This  seems  an  absurdity  at  first  sight,  since 
nothing  looks  clearer  than  the  statement  that  the  rent  enters  into 
the  cost  of  production.  But  the  causal  connection  is  just  the  reverse 
of  that  commonly  supposed  to  exist,  for  high  rent  is  the  result  of 
high  prices.  Prices  are  determined  by  the  cost  of  production  on  the 
margin  and  whatever  increases  the  cost  of  production  on  the  margin 
increases  rent.  Society  is  therefore  not  injured  because  the  owner 
of  a  valuable  tract  of  land  gets  high  rents,  but  it  is  injured  by  the 
forces  that  increase  the  cost  of  production  on  the  margin. 

127.  RENT  AN  UNEARNED  INCOME.  From  what  has  been 
said  it  appears  that  rent  "grows"  without  any  thought  or  effort  on 
the  part  of  the  owners  of  the  natural  agents  of  production.  Rent 
is  not  the  result  of  labor,  but  the  result  of  natural  monopoly.  As 
there  is  not  enough  of  the  best  lands  to  supply  the  needs  of  man, 
poore'r  lands  must  be  resorted  to,  and  this  causes  rent  to  come  into 
existence,  by  giving  to  the  owners  of  the  better  lands  an  increased 
income.  Any  force  which  raises  the  cost  of  cultivation  on  the  mar- 
ginal land,  or  causes  poorer  lands  to  come  into  cultivation,  increases 
the  rent  on  the  lands  above  the  margin.  Rent  is  not  the  result  of 
the  bountifulness  of  nature  but  of  the  niggardliness  of  nature.  As 
population  increases  and  needs  more  food,  poorer  lands  must  be  re- 
sorted to,  which  increases  the  price  of  agricultural  produce,  and  this 
increase  in  price  automatically  increases  the  rent  on  all  lands  above 


ELEMENTS  OF  ECONOMICS  197 

the  margin. 

It  is  sometimes  urged  that  not  all  of  rent  is  unearned  in  case  of 
the  pioneer  who  goes  out  into  the  wilderness  and  brings  new  lands 
into  cultivation.  Part  of  the  rent,  it  is  urged,  is  reward  for  the  toils 
and  privation  of  pioneer  life.  But  this  toil  and  privation  is  the 
cause  of  high  cost  of  cultivation  on  the  margin,  and  in  the  natural 
workings  of  competition  is  rewarded  by  high  price  of  produce.  It 
is  true  that  in  anticipation  of  the  future  increase  in  the  value  of  the 
lands  in  the  "pioneer"  country  too  many  may  take  up  new  lands 
and  unduly  increase  the  supply  of  produce  and  depress  prices  below 
the  normal  cost  level  on  the  margin.  In  the  early  days  of  the  pioneer 
better  days  were  always  expected  in  the  future.  For  a  time,  there- 
fore, their  rewards  were  not  enough  to  cover  ordinary  wages  and 
interest  on  capital  invested.  In  a  sense,  therefore,  the  first  rents 
that  appeared  when  the  margin  of  cultivation  had  passed  beyond 
these  pioneers  may  be  considered  as  compensation  for  the  low  wages 
and  low  interest  during  the  pioneer  days.  But  this  is  a  very  small 
part  of  the  economic  rent  in  existence.  Lands  which  cost  nothing 
fifty  years  ago  are  now  worth  a  hundred  dollars  an  acre  or  more, 
and  in  such  cases  the  amount  of  the  rent  that  is  due  to  hardships 
of  pioneer  days  is  too  small  to  be  considered. 

128.  RENT  AND  THE  INCREASE  OF  POPULATION.  We  have 
repeatedly  referred  to  the  fact  that  an  increase  in  population  in- 
creases rent.  It  is  now  time  to  see  just  why  this  is  true  and  to 
see  the  effects  of  it  upon  the  welfare  of  the  human  race.  As  popu- 
lation increases,  more  food  and  other  products  of  the  land  are  needed 
in  the  cities.  To  meet  the  new  demands  for  the  products  of  the  land, 
poorer  lands  must  be  brought  into  cultivation,  and  this  increases  the 
cost  on  the  margin,  and  the  increased  cost  increases  prices,  and  in 
cities  the  increased  demand  for  the  desirable  location  increases  urban 
rents. 

It  is  the  increasing  prices  of  products  and  the  increasing  cost  of 
a  place  in  which  to  live  that  bear  ever  harder  upon  the  lower  classes. 


198  ELEMENTS   OF   ECONOMICS 

With  the  increase  in  population  an  ever  increasing  amount  goes  to 
the  owners  of  the  superior  lands.  But  the  owners  of  the  superior 
lands  are  not  to  blame  for  this  increasing  cost  of  living  and  the  in- 
creasing hardship  which  results  to  the  wage  earners  unless  wages 
rise  with  rents.  But  the  wages  of  the  unskilled  laborer  in  this  coun- 
try have  not  risen  with  rents  in  the  last  generation,  and  in  the  case 
of  a  very  large  percentage  of  unskilled  workers  money  wages  have 
actually  declined.  Thus  an  increase  in  population,  if  it  comes  chiefly 
among  the  lower  ranks,  naturally  places  them  between  two  mill- 
stones; oversupply  of  labor  depresses  money  wages  and  increasing 
rent  enhances  the  cost  of  living.  If  the  owners  of  the  superior  lands 
are  not  to  blame  for  this  increased  suffering  of  humanity,  who  is  to 
blame?  Nobody  is  to  blame  except  those  who  unduly  increase  the 
population  and  thus  increase  the  cost  of  production  on  marginal  land. 
Rent  in  case  of  agricultural  lands  is  not  the  cause  of  high  prices  but 
the  result  of  high  cost  on  the  margin.  In  case  of  urban  rents,  the  in- 
crease is  due  to  a  shortage  in  supply  of  the  best  sites,  and  the  owners 
of  them  are  not  to  blame  if  there  is  an  increased  demand  for  them. 

129.  THE  SINGLE  TAX.  Considering  the  ill  effects  of  increas- 
ing rents,  Henry  George  worked  out  a  theory  of  taxation  which  may 
be  briefly  stated  as  follows:  The  product  of  a  man's  own  labor  is 
absolutely  his  and  the  state  has  no  right  to  tax  it.  Rent  is  unearned, 
and  the  state  has  a  right  to  take  it  away  by  taxation,  and  a  tax  on  rent 
is  therefore  the  only  justifiable  tax.  Since  all  the  rental  value 
of  land  accumulated  in  past  years  is  due  to  social  forces,  society 
has  a  right  to  take  it  all  and  not  merely  the  future  increase  in 
rents.  Most  of  the  poverty  of  society  is  due  to  increasing  rents, 
hence,  a  tax  which  takes  away  rents  will  relieve  poverty. 

The  first  proposition  is  inadmissable.  The  state  must  exist,  it 
must  have  funds,  and  it  has  a  right  to  take  from  the  members  of 
society,  who  receive  the  benefits  of  the  state's  activity,  the  funds  for 
its  support.     The  third  proposition  cannot  be  accepted.     Society  has 


ELEMENTS  OF  ECONOMICS  199 

permitted  people  in  good  faith  to  purchase  land,  often  with  their  hard 
earned  money,  and  to  confiscate  it  would  be  an  unjust  robbery.  The 
last  proposition  is  only  partly  true.  Increasing  rents  are  only  partly 
responsible  for  poverty,  low  wages  of  the  unskilled  laborers  being 
the  chief  cause.  Moreover,  the  taking  of  rents  by  the  state  will  not 
in  the  least  lower  the  rents  and  will  therefore  relieve  poverty  only 
in  so  far  as  other  taxes  would  be  abolished.  It  is  strange  that  the 
advocates  of  the  single  tax  imagine  that  rents  are  to  be  lessened  by 
taxing  them.  It  is  possible  that  the  price  of  lands  held  for  specula- 
tive purposes,  especially  city  building  lots,  would  fall  in  value.  But 
it  is  not  possible  that  true  economic  rent  will  be  lowered  by  taxing 
it.  Agricultural  rent  is  determined  by  the  marginal  cost  of  pro- 
duction, which  would  not  be  affected  by  a  tax  on  rent,  because  mar- 
ginal land  pays  no  rent.  The  single  tax  would  simply  give  the  rent 
to  the  state  and  would  not  destroy  it. 

About  all  that  can  be  said  in  favor  of  a  tax  on  rent  is  that  it 
is  an  excellent  source  of  taxation,  among  other  kinds  of  taxes.  It 
does  not  appear  reasonable  that  real  estate  should  pay  all  the  taxes 
and  the  great  corporations  go  free.  As  a  special  tax  for  cities,  a 
tax  on  urban  rents  is  being  favorably  considered  in  several  countries, 
and  land  taxes,  levied  on  rental  values,  is  also  coming  into  use.  On 
the  whole,  though  most  of  Mr.  George's  theories  are  not  to  be  ac- 
cepted, he  has  nevertheless  pointed  out  an  excellent  additional  source 
of  taxation. 


200  ELEMENTS  OF  ECONOMICS 

CHAPTER  XV. 
Interest. 

130.  NATURE  OF  INTEREST.  Interest  is  the  reward  of  capital 
and  springs  from  the  advantages  of  the  capitalistic  method  of  pro- 
duction. Capital  multiplies  many  fold  the  productive  power  of  man. 
It  is  estimated,  for  example,  that  machinery  for  spinning  and  weav- 
ing cloth  has  multiplied  man's  productive  power  three  hundred  fold, 
not  counting  the  labor  of  making  the  machinery.  The  modem  rail- 
way multiplies  efficiency  many  fold.  But  the  owners  of  capital  do 
not  reap  all  the  advantage,  because  competition  among  the  owners 
of  capital  compels  them  to  share  the  advantage  with  consumers.  In- 
terest, therefore,  is  not  what  capital  earns  for  society  but  what  it 
earns  for  its  owner,  which  is  much  less  than  what  it  earns  for 
society. 

We  have  seen  that  rent  is  not  a  uniform  rate  received  from 
all  land,  but  a  variable  amount.  Interest,  on  the  other  hand,  tends 
towards  uniformity  in  the  same  community.  Where  there  is  no  ele- 
ment of  risk,  interest  received  on  capital  loaned  is  quite  uniform  in 
the  same  locality.  This  is  because  free  capital  in  the  form  of  money 
or  credit  is  the  form  in  which  capital  is  loaned,  and  it  is  homogeneous. 
Capital  goods  in  which  money  is  invested  is  not  homogeneous  nor 
does  the  concrete  capital  in  different  forms  earn  the  same  amounts, 
necessarily,  though  competition,  where  it  exists,  has  a  tendency  to 
reduce  the  earning  power  of  all  capital  to  a  uniform  level.  For  these 
reasons  we  may  speak  of  an  average  rate  of  interest.  In  this  respect 
the  earnings  of  capital  are  similar  to  the  wages  of  labor  of  the  same 
grade. 

131.  THEORIES  OF  INTEREST.  There  are  several  theories  of 
interest,  three  of  which  should  be  briefly  considered.  One  is  the 
abstinence  theory,  which  holds  that  interest  is  the  reward  of  absti- 
nence. The  accumulation  of  capital  is  looked  upon  as  a  disagreeable 
process,  in  which  one  foregoes  present  pleasures  with  the  hope  of 
increasing  future  pleasures.    A  similar  theory  is  that  interest  is  the 


ELEMENTS  OF  ECONOMICS  201 

reward  of  waiting.  The  Socialists  ridicule  these  theories.  Imagine, 
say  they,  the  Goulds  and  Vanderbilts  and  Camegies  pinching  and 
saving  and  undergoing  great  hardships  in  increasing  their  capitaL 
But  it  is  a  sufficient  answer  to  the  Socialists  to  point  out  the  fact  that 
not  all  capital  is  saved  by  millionaires  but  a  considerable  portion 
is  saved  by  the  middle  classes  who  do  forego  many  present  pleasures, 
and  not  a  little  is  saved  by  the  poorer  classes  as  is  proved  by  savings 
banks  and  insurance  companies.  A  third  theory  of  interest  is  the 
productivity  theory,  which  holds  that  interest  is  paid  because  of  the 
productive  powers  of  capital. 

All  of  these  theories  are  incomplete  and  not  all  of  them  are 
looking  at  interest  from  the  same  point  of  view.  The  abstinence 
theory,  especially  in  the  hands  of  modern  writers,  is  an  attempt  ta 
justify  the  payment  of  interest.  The  productivity  theory,  on  the 
other  hand,  is  an  attempt  to  explain  why  interest  is  paid  and  what 
determines  the  rate.  Each  class  of  writers  sees  a  certain  amount  of 
truth.  Each  of  the  forces,  abstinence,  waiting  and  productivity,  plays 
a  part  in  explaining  both  why  interest  is  paid  at  all  and  how  much, 
and  at  the  same  time  all  these  factors  together  afford  a  sufficient 
justification  for  the  payment  of  interest.  Whatever  hardship  is  in- 
volved in  saving  tends  to  lessen  the  amount  of  capital,  which  in  turn 
affects  its  earning  power,  as  we  shall  see  later,  and  people  save 
because  capital  has  power  in  production.  From  the  borrower's  point 
of  view  interest  is  paid  on  capital  only  because  it  is  productive  and 
its  earning  power  determines  wheat  the  borrower  is  willing  to  give. 

132.  DEMAND  AND  SUPPLY.  The  forces  determining  the  rate 
of  interest  are  demand  and  supply  and  productivity.  Demand  and 
supply  are  relative,  as  in  the  case  of  demand  and  supply  of  goods 
or  labor  in  the  theory  of  prices  or  of  wages.  As  demand  for  capital 
increases,  the  rate  of  interest  rises,  because  the  owners  of  loan  capital 
take  advantage  of  the  situation  as  the  owners  of  ordinary  goods  do 
under  like  conditions.  Competition  among  those  who  wish  to  borrow 
capital  sends  up  the  rate  of  interest  just  as  competition  among  buy- 


202  ELEMENTS  OF  ECONOMICS 

*ers  forces  up  the  prices  of  goods  when  there  is  an  increase  in  de- 
mand. A  decrease  in  demand  lowers  interest  because  owners  of  cap- 
ital then  compete  with  each  other  to  keep  their  capital  all  loaned. 

An  increase  in  the  supply  of  capital  also  brings  increased  com- 
petition among  owners  to  keep  it  all  invested  and  the  rate  of  interest 
falls.  An  increase  in  the  supply  of  capital  affects  the  earning  power 
of  capital,  and  this  leads  to  the  third  great  factor  determining  the 
rate  of  interest. 

133.  PRODUCTIVITY.  The  main  factor  determining  the  rate  of 
interest  is  the  productivity  of  capital.  Productivity  is  the  main  factor 
because  it  directly  determines  what  borrowers  can  afford  to  pay  and 
thus  affects  demand,  and  productivity  also  determines  indirectly  the 
supply.  The  greater  the  productivity  the  greater  the  accumulation 
of  capital  for  the  future,  and  the  rapid  accumulation  of  capital  will 
in  time  reduce  the  rate  of  interest.  Thus  there  is  a  very  intricate 
interplay  of  forces. 

Productivity  of  capital  may  mean  at  least  three  different  things. 
It  may  mean  (1)  the  advantage  gained  by  society  from  the  use  of 
capital  as  an  instrument  of  production,  (2)  the  productivity  of  in- 
dustry as  a  whole,  (3)  the  marginal  productivity  of  capital. 

Let  us  consider  each  of  these  in  order.  As  stated  above,  interest 
is  not  measured  by  the  labor  saving  power  of  machinery,  because  of 
competition  of  the  owners  of  the  machinery.  If,  for  example,  a  man 
invents  a  machine  that  will  do  twice  the  work  of  the  old  machine,  he 
can  retain  nearly  the  whole  advantage  of  the  new  machine  if  he  can 
secure  a  monopoly  of  its  use.  Thus  our  patent  laws  often  create  mil- 
lionaires. But  when  the  patent  expires  others  use  it  and  the  price 
of  the  article  made  by  the  machine  falls  until  capital  invested  in 
it  makes  about  the  rate  prevailing  in  other  industries,  because  so 
long  as  interest  in  one  field  remains  above  the  average  rate  capital 
will  pour  into  the  field  and  increase  the  supply  of  goods,  and  the 
laws  of  consumption  bring  down  prices.  Hence,  the  productivity  of 
capital  in  this  sense  does  not  govern  the  rate  of  interest.     The  own- 


ELEMENTS  OF  ECONOMICS  203 

ers  of  capital,  however,  are  benefited  as  consumers  by  the  improve- 
ment in  the  efficiency  of  capital,  since  they  get  their  goods  cheaper 
and  thus  enjoy  what  economists  have  called  consumers'  surplus. 

Productivity  of  capital  may  mean  the  productivity  of  industry 
as  a  whole,  meaning  the  efficiency  of  the  three  factors,  land,  labor 
and  capital.  In  a  new  country  with  rich  virgin  soil  and  rich  mineral 
deposits,  the  rate  of  interest  may  be  high.  But  it  will  not  necessarily 
be  high.  If  laborers  are  scarce,  wages  may  absorb  most  of  the 
special  advantages  of  that  country  over  others,  and  in  that  case 
interest  would  not  be  especially  high,  though  it  would  be  apt  to 
be  above  rates  in  older  countries,  because  of  the  relative  scarcity 
of  capital.  In  the  latter  case  both  wages  and  interest  would  be  above 
rates  in  other  countries  less  favored.  Thus  general  productivity 
has  an  effect  upon  the  rate  of  interest,  though  the  productiveness 
does  not  exactly  measure  the  rate,  since  capital  may  have  to  share 
with  labor  the  advantages  of  the  rich  natural  resources. 

But  the  rate  of  interest  is  measured  by  marginal  productivity, 
which,  as  in  the  case  of  labor,  may  not  correspond  at  all  with  the 
general  productivity  of  industry.  Let  us  take  an  illustration.  Sup- 
pose one  railroad  could  easily  handle  all  the  traffic  between  two 
places.  If  another  railroad  is  run  parallel  to  it  and  gets  half  the 
traffic,  each  road  will  have  its  earnings  reduced  by  at  least  one-half, 
and  probably  more,  owing  to  the  law  of  economy  in  large-scale  pro- 
duction. If  competition  should  reduce  the  rates,  earnings  would  be 
still  further  reduced.  Again  suppose  there  are  ten  shoe  factories  in 
the  community  and  that  they  are  able  to  supply  all  the  shoes  wanted. 
If  another  shoe  factory  is  set  up,  each  factory  will  have  smaller  sales 
and  prices  will  also  be  reduced.  If  the  increase  in  capital  is  general 
and  labor  is  not  increasing  as  rapidly  as  capital,  the  law  of  propor- 
tionate use  of  the  three  factors  would  come  into  play,  and  each  addi- 
tional *'dose''  of  capital  would  find  it  harder  to  wedge  its  way  into 
the  industrial  machine  and  its  earning  power  would  constantly  be 
reduced,  because  the  two  factors,  labor  and  capital,  would  be  more 


204  ELEMENTS  OF  ECONOMICS 

and  more  out  of  proportion.  This  would  mean  and  increasing:  demand 
for  labor,  with  a  consequent  rise  of  wages.  Thus  as  capital  increases, 
labor  remaining  the  same,  the  earning  power  of  capital  falls  for 
three  reasons,  (1)  the  fall  in  the  marginal  productivity,  considering 
merely  the  physical  product,  (2)  the  fall  in  prices  of  products,  (3) 
the  rise  in  wages. 

To  summarize,  we  may  say,  briefly,  that  the  rate  of  interest  de- 
pends mainly  upon  the  marginal  productivity  of  capital,  which  is  de- 
termined by  the  productivity  of  industry  and  the  relation  between  the 
number  of  laborers  and  the  amount  of  capital. 

134.  LONG-  AND  SHORT-TIME  LOANS.  Long-time  loans  do 
not  depend  upon  the  amount  of  money  in  circulation,  because  the 
earning  power  of  capital  does  not  depend  upon  the  amount  of  money. 
This  is  true  except  in  the  extreme  case  where  money  is  so  scarce  that 
industry  is  hindered.  Under  such  conditions  an  increase  in  the 
amount  of  money  would  stimulate  industry  and  make  it  more  pro- 
ductive and  the  rate  of  interest  would  rise.  The  common  notion  is, 
however,  that  an  increase  in  the  amount  of  money  lowers  the  rate  of 
interest  because  it  decreases  the  demand  for  capital.  Demand  is 
not  merely  for  money,  however,  but  for  the  instruments  of  produc- 
tion. And  the  rate  of  interest  depends  upon  the  demand  and  supply 
and  marginal  productivity  of  capital,  meaning  the  concrete  instru- 
ments of  production.  An  increase  in  the  amount  of  money  would 
not  increase  or  decrease  the  number  of  tools  and  machines  nor  make 
them  more  productive,  except  in  case  society  was  experiencing  a 
money  famine,  such  as  it  experienced  in  the  Middle  Ages.  Under 
ordinary  conditions,  therefore,  the  rate  of  interest  does  not  depend 
upon  the  amount  of  money,  for  long-time  loans. 

For  short-time  loans,  however,  the  case  is  somewhat  different. 
If  loan  capital,  either  money  or  credit,  is  temporarily  scarce,  owing 
to  some  disturbance  in  the  money  market,  business  men  will  exper- 
ience difficulty  in  securing  their  accustomed  loans  from  banks,  and 
if  they  cannot  get  loans  their  business  may  be  disarranged.     Under 


ELEMENTS  OF  ECONOMICS  205 

these  conditions  the  rate  on  short-time  loans  will  rise.  And  the  rate 
may  go  far  above  the  ordinary  rate  on  long-time  loans,  because  men 
may  lose  more  by  failing  to  secure  a  loan  to  help  them  out  of  a 
tight  place  than  they  would  lose  by  paying  high  interest  charges. 

135.  THE  JUSTIFICATION  OF  INTEREST.  The  payment  of 
interest  has  been  assailed  as  unjust  by  many  writers  of  all  ages 
from  the  time  of  the  Ancient  Greeks,  and  early  Christian  nations  for- 
bade the  payment  of  interest.  The  ancients  attacked  the  payment  of 
interest  on  the  ground  that  money  is  barren.  This  idea  arose  partly 
because  money  was  usually  borrowed  not  for  productive  operations 
but  for  indulging  in  leisure,  and  partly  because  capital  in  the  modern 
sense  hardly  existed.  The  early  Christian  writers  assailed  the  pay- 
ment of  interest  both  because  money  was  considered  "barren"  and 
because  it  was  deemed  a  breach  of  brotherly  love  to  charge  a  man 
interest. 

The  Socialists  hold  that  the  payment  of  interest  robs  labor. 
The  capitalist  is  considered  a  social  parasite  who  gathers  where  he 
has  not  sown.  In  the  view  of  the  Socialists,  labor  creates  the  whole 
product,  capital  and  all,  and  that  the  whole  product,  therefore,  be- 
longs to  labor.  '  Much  depends  upon  what  is  meant  by  labor.  It  is 
quite  true  that  capital  was  created  by  the  efforts  of  man,  and  in  that 
general  sense  labor  created  capital.  But  there  is  more  than  physical 
labor  required  to  create  capital.  As  we  have  seen  in  a  previous  sec- 
tion, the  creation  of  capital  requires  three  distinct  processes.  First 
is  the  mental  activity  which  conceives  the  ideas  embodied  in  the  in- 
strument of  production.  That  is,  it  had  to  be  invented.  Secondly, 
the  ideas  had  to  be  embodied  in  the  machine,  that  is,  labor  had  to 
make  it.  Thirdly,  in  order  to  direct  labor  towards  the  production  of 
tools  and  machinery,  funds  must  be  saved  from  current  income. 
Present  pleasures  must  be  reduced  in  order  to  save  for  investment. 
It  is  therefore  incorrect  to  assume  that  labor  alone  creates  capital. 
Finally,  no  one  can  maintain  the  proposition  that  the  present  labor 
force  of  the  world  created  the  capital  of  the  world.    It  was  not  they 


206  ELEMENTS  OF  ECONOMICS 

or  their  ancestors  that  invented  and  saved  and  planned  and  thus 
made  possible  the  creation  of  the  capital  of  the  world.  If  they  or 
their  ancestors  had  thus  invented  and  saved  and  planned  they  would 
have  been  the  capitalist  class  and  would  not  have  been  Socialists. 

The  payment  of  interest  needs  no  defense.  It  is  a  matter  of 
practical  utility.  No  man  or  class  of  men  is  denied  the  right  to  in- 
vent and  plan  and  save,  and  because  this  is  done  by  a  comparatively 
few  individuals,  the  enterprising  ones  should  not  be  deprived  of  the 
advantages  which  the  ownership  of  capital  brings.  Without  the  hope 
of  reward  which  the  ownership  of  capital  brings,  it  is  safe  to  say 
that  there  would  be  little  invention  or  planning  or  saving. 

No  doubt  the  payment  of  interest  allows  a  capitalist  leisure 
class  to  grow  up,  which  in  a  few  generations  may  become  in  a  sense 
social  parasites,  since  they  live  on  the  interest  of  past  accumulations 
without  contributing  anything  to  society.  Also  rivalry  and'  the 
scramble  for  wealth  may  become  too  severe  and  even  unchristian. 
These  are  some  of  the  evils  which  society  should  endeavor  to  correct 
by  the  inculcation  of  a  higher  sense  of  stewardship  and  brotherly 
love. 


ELEMENTS   OF   ECONOMICS  207 

CHAPTER  XVI. 
Profits. 

136.  NATURE  OF  PROFITS.  Profits  are  the  reward  of  the 
business  manager,  and  are  in  a  sense  a  kind  of  wages.  Wages  and  ' 
profits  are  alike  in  several  respects.  Unlike  interest,  both  wages 
and  profits  vary  widely.  Wages  range  from  the  mere  pittance  of 
$300  or  $400  a  year  to  $50,000  a  year  or  more;  profits  range  from 
zero  up  into  the  millions.  Both  wages  and  profits  are  earned,  and 
are  therefore  unlike  rent.  Profits  are  earned,  however,  only  when 
no  monopoly  exists.  In  that  case  profits  are  like  rent,  unearned,  as 
they  do  not  come  from  skill  in  management  but  from  arbitrary 
power  to  raise  prices. 

Profits  and  wages  are,  however,  unlike  in  several  important 
respects.  Wages  change  slowly,  while  profits  change  rapidly,  going- 
up  in  good  years  and  going  down  in  "lean"  years.  There  is  a  slight 
tendency  for  wages  to  fall  also  in  times  of  industrial  depression,  but 
as  compared  with  the  great  fluctuations  of  profits,  wages  are  fairly 
stable.  Wages  and  profits  differ  in  another  respect.  Profits,  over 
short  periods  of  time  at  least,  are  a  residual  share,  while  wages 
receive  a  rate  stipulated  in  advance. 

This  residual  character  comes  from  the  position  of  the  business 
manager.  He  hires  the  laborers,  rents  or  leases  land,  and  usually 
borrows  a  part  of  his  capital,  and  to  laborer,  capitalist  and  landlord 
he  pays  a  stipulated  amount.  If  his  plans  turn  out  well,  his  profits 
will  be  high,  but  if  they  do  not  his  profits  will  be  low,  or  he  may 
even  suffer  loss.  Hence,  over  short  periods  of  time  the  manager 
gets  what  is  left  after  paying  interest,  wages  and  rent.  These  in 
brief  are  the  general  characteristics  of  profits.  Let  us  take  up  some 
of  these  points  in  detail. 

137.  A  RESIDUAL  SHARE.  Over  short  periods  profits  are  a 
residual  share  or  a  surplus,  because  the  employer  is  the  buffer,  so  to 
speak,  between  waves  of  industrial  prosperity  or  adversity  on   the 


208  ELEMENTS   OF   ECONOMICS 

one  side  and  laborers,  capitalists  and  landlords  on  the  other.  General 
conditions  of  demand  and  supply  determine  what  he  must  pay  for 
labor  and  capital  and  land.  Not  every  business  manager  borrows 
capital  and  rents  land;  but  such  a  large  number  do  that  the  rates  of 
interest  and  the  amount  of  rer^t  is  easily  determined,  at  least  rough- 
ly. Hence  each  manager  can  tell  roughly  whether  he  is  making  any- 
thing above  rent  and  interest,  that  is,  whether  he  is  making  any 
profits  or  not,  and  if  he  is,  how  much. 

Over  long  periods  of  time,  however,  profits  are  not  a  mere 
residual  share,  because  the  manager  is  a  factor  in  the  various  bar- 
gaining processes.  He  bargains  with  his  laborers,  but  he  is  a  dis- 
tinct factor  in  the  bargain.  He  is  not  compelled  to  pay  what  laborers 
ask,  regardless  of  circumstances.  Conditions  of  demand  and  supply 
and  productivity  he  knows  far  better  than  his  laborers,  and  he  is  not 
therefore  a  helpless  victim,  but  a  very  active  factor  in  determining 
what  he  shall  pay.  In  his  bargain  with  interest  receivers  he  is  also 
an  active  factor.  He  knows  the  conditions  of  demand  and  supply 
of  capital  and  its  marginal  productivity,  on  the  whole,  and  he  is  an 
active  factor  in  deciding  what  shall  be  the  rate  of  loan  interest. 
Even  the  amount  of  rent  he  pays  is,  to  a  limited  extent  the  result 
of  a  bargaining  process,  though  rent  is  more  nearly  predetermined 
by  circumstances  over  which  neither  party  to  the  bargaining  process 
has  any  control  than  is  the  case  with  wages  or  interest.  Thus  in  the 
long  run  profits  are  not  determined  by  accident,  but  by  general 
economic  conditions  and  the  relative  shrewdness  and  strength  of  the 
different  parties  to  the  various  bargains. 

138.  NO  UNIFORM  RATE.  As  stated  above,  profits  vary  wide- 
ly. The  figure  of  the  pyramid  applies  as  in  the  case  of  labor, 
though  the  layers  are  less  sharply  defined.  The  great  mass  of  man- 
agers make  very  little  above  interest  on  their  capital,  and  many  make 
no  profits  at  all.  A  smaller  number  make  fair  profits,  a  still  smaller 
number  make  large  profits  and  far  above  all  the  rest  are  the  great 
"captains  of  industry"  who  make  enormous  profits.     And  we  here 


ELEMENTS  OF  ECONOMICS  209 

speak  not  of  the  amount  of  profits  but  the  rate  upon  the  capital 
invested. 

The  causes  of  these  differences  in  the  rate  of  profits  are  differ- 
ences in  managing  ability  and  differences  in  the  size  of  the  estab- 
ments.  We  have  already  discussed  the  advantages  of  large-scale 
production  and  all  that  is  necessary  at  this  point  is  to  call  attention 
to  them.  Differences  in  managing  ability  are  due  mainly  to  inborn 
characteristics,  though  training  and  experience  are  necessary  to 
give  those  pov^ers  an  opportunity  to  develop.  Great  managing  abil- 
ity includes  several  things,  among  them  being  judgment  in  buying 
and  knowledge  of  market  conditions. 

A  different  set  of  causes  for  lack  of  uniformity  in  profits  is 
connected  with  various  temporary  fluctuations  in  business  condi- 
tions. In  agriculture  and  allied  industries  seasonal  changes  alter- 
nately increase  or  decrease  profits.  Changes  in  fashion  also  play 
their  part,  and  the  producer  who  can  forecast  coming  freaks  of 
fashion  reaps  handsome  rewards.  Periods  of  industrial  depression 
affect  more  widely  rates  of  profits,  as  such  reverses  overtake  whole 
communities  rather  than  a  few  individuals.  Then  in  periods  of 
"boom*'  profits  are  high. 

139.  PROFITS  AND  INTEREST.  As  indicated  by  the  previous 
discussion,  profits  are  not  a  residual  share  in  the  long  run,  since  the 
employer  or  manager  is  one  of  the  factors  in  the  various  bargains 
which  determine  wages  and  interest.  This  suggests  a  connection 
between  interest  and  profits.  Any  industrial  changes  that  make 
business  more  profitable  enhance  first  the  earnings  of  the  business 
manager.  As  the  general  range  of  profits  tends  to  rise,  loan  interest 
will  naturally  tend  to  rise.  Those  who  loan  capital  keep  posted  on 
industrial  conditions,  and  any  rise  in  the  earnings  of  the  managers 
of  industry  would  naturally  cause  them  to  demand  higher  rates,  and 
since  lenders  of  capital  constitute  one  factor  in  the  bargaining 
process,  loan  interest  would  tend  to  rise.  Also  the  presence  of  a 
large  number  of  able  managers  would  cause  them   to  bid   against 


210  ELEMENTS  OF  ECONOMICS 

one  another  for  capital,  in  order  to  enlarge  their  business,  and 
this  would  cause  the  rate  of  loan  interest  to  rise. 

On  the  other  hand,  a  fall  in  the  rate  of  profits  would  be  followed 
by  a  fall  in  the  rate  of  interest.  If  managers  could  not  make  much 
the  demand  for  loan  interest  would  not  be  active  and  strong  and 
the  rate  of  loan  interest  would  fall.  Thus  profits  and  interest  tend 
to  rise  and  fall  together,  though  profits  take  the  lead  and  the 
changes  in  rates  of  interest  follow  somewhat  tardily. 

140.  PROFITS  AND  WAGES.  Profits  and  wages  are  also  con- 
nected, but  the  connection  is  different  from  that  between  profits  and 
interest.  As  wages  fall,  owing  to  increase  in  the  number  of  laborers, 
profits  rise.  Or  a  sudden  improvement  in  machinery  on  a  vast  scale, 
as  during  the  Industrial  Revolution,  will  throw  men  out  of  employ- 
ment in  vast  numbers  and  wages  fall.  Under  such  conditions,  how- 
ever, profits  are  abnormally  high.  During  the  Industrial  Revolution 
in  England,  vast  fortunes  were  made  by  manufacturers  in  a  few 
years,  while  a  large  portion  of  the  laboring  population  were  on  the 
verge  of  starvation.  Wages  may,  however,  under  some  circumstances, 
rise  with  the  rise  in  rates  of  profits.  In  periods  of  prosperity  in- 
creasing demand  for  labor  raises  wages,  while  profits  also  increase. 

Since  extra  high  profits  of  one  employer  over  another  are  due 
to  managing  ability  chiefly,  it  follows  that  extra  high  profits  do  not 
come  out  of  wages.  This  is  on  the  supposition  that  different  em- 
ployers pay  the  same  rates  of  wages  for  the  same  class  of  labor.  La- 
borers therefore  have  no  just  grievance  against  those  employers 
who  by  their  superior  ability  are  able  to  secure  a  larger  product. 
In  fact,  the  able  managers  are  a  special  benefit  to  society  as  a 
whole,  including  the  laboring  men,  because  they  increase  the  total 
product  of  society  and  thus  make  possible  a  larger  income  to  all 
members  of  society. 

This  does  not  mean  that  employers  generally  may  not  take  ad- 
vantage of  conditions  of  the  labor  market  and  depress  wages.  Under 
these  circumstances  increased  profits  would  come  out  of  wages. 


ELEMENTS  OF  ECONOMICS  211 

141.  DISTRIBUTION  AND  SOCIAL  PROGRESS.  There  are 
four  phases  of  social  progress  of  the  present  time  that  are  of  vital 
importance  and  that  deeply  affect  the  distribution  of  a  nation's 
wealth.  These  phases  of  progress  are  the  improvement  of  the  instru- 
ments of  production,  the  increase  in  the  size  of  the  business  unit,  in- 
creasing monopoly,  and  the  increase  in  population. 

With  the  improvement  in  machinery  productivity  increases, 
profits  rise  rapidly,  interest  follows  more  slowly,  and,  when  improve- 
ments come  suddenly  on  a  large  scale,  men  are  thrown  out  of  em- 
ployment and  wages  fall.  In  course  of  time,  however,  unless  low 
standards  of  living  among  laborers  prevent,  by  keeping  the  labor 
market  oversupplied,  the  wants  of  the  community  will  expand,  ma- 
chinery of  the  old  type  and  new  machinery  for  supplying  new  wants 
will  multiply,  demand  for  labor  will  increase,  and  wages  will  rise. 
Thus  the  final  result  may  be  a  rise  in  prices,  interest  and  wages,  all 
three  agents  sharing  in  the  increased  product. 

The  increase  in  the  size  of  the  business  unit  enhances  profits, 
especially  of  men  of  the  greatest  ability,  because  the  larger  business 
unit  gives  more  opportunities  for  using  great  ability.  This  increase 
in  the  size  of  the  business  unit  decreases  the  number  of  independent 
managers,  and  the  employing  class  becomes  more  of  an  aristocracy 
of  wealth.  Instead  of  millions  of  business  managers  with  moderate 
wealth,  there  comes  to  be  a  few  thousand  managers  with  a  few  mil- 
lions of  capital  and  at  the  top  a  few  scores  of  men  with  hundreds  of 
millions.  If  these  vast  fortunes  are  made  by  real  skill  in  managing 
legitimate  business,  the  public  are  not  injured,  necessarily.  If,  how- 
ever, these  vast  fortunes  are  made  by  gambling  in  stocks  or  in  mis- 
managing large  business  in  the  interests  of  the  few  managers,  so- 
ciety is  injured  by  the  accumulation  of  such  vast  fortunes.  There 
is  political  danger  in  such  great  fortunes,  also,  since  a  few  men  might 
use  their  vast  wealth  to  corrupt  or  influence  the  government  to  get 
legislation  to  help  them  pile  up  more  billions. 

Increasing  monopoly  is  wholly  evil.  It  is  not  attended  with  in- 


212  ELEMENTS  OF  ECONOMICS 

creased  efficiency,  except  in  the  case  of  natural  monopolies.  The  re- 
sult of  increasing  monopoly  outside  of  the  natural  monopolies  does 
not  increase  the  social  wealth  but  only  diverts  an  increasing  pro- 
portion of  it  into  the  pockets  of  a  few,  to  the  detriment  of  all  the  re- 
mainder of  society.  Monopoly,  therefore,  must  be  suppressed  when 
possible,  and  where  suppression  is  impossible,  the  monopoly  must 
be  either  regulated  or  owned  by  the  government. 

The  fourth  main  factor  in  social  progress  is  the  increase  in  pop- 
ulation. This  increases  demand  for  food  and  other  agricultural 
products,  the  demand  is  supplied  at  an  increased  cost  of  production 
which  at  once  increases  rent  and  the  cost  of  living,  and  the  increasing 
cost  of  living  diminishes  the  income  of  all  except  the  landowners.  If 
the  increase  in  population  comes  largely  from  the  laboring  classes, 
as  it  invariably  does,  wage  earners  will  be  injured  not  only  by  the 
increasing  cost  of  living  but  by  the  fall  in  money  wages,  unless  the 
increase  in  capital  keeps  pace  with  the  increase  in  laborers. 

The  net  results  of  the  interplay  of  all  these  complex  forces  are, 
in  the  United  States  especially,  (1)  a  great  increase  in  the  wealth  of 
the  landowning  class,  which  fortunately  is  numerous,  (2)  the  growth 
of  fabulous  fortunes  in  the  hands  of  a  few,  (3)  increasing  wealth  of  a 
relatively  smaller  number  of  business  men  below  the  multi-million- 
aires, (4)  increasing  wages  of  the  workers  in  the  upper  and  middle 
portions  of  the  pyramid  of  labor,  and  (5)  the  lower  layer  of  the  pyra- 
mid sinking  into  worse  conditions  than  were  ever  known  before  in 
this  country.  Out  of  these  complex  results  grow  the  great  social 
problems  of  distribution.  The  problem  of  monopoly  we  have  elready 
discussed.     Labor  problems  must  now  be  considered. 


ELEMENTS   OF   ECONOMICS  213 

CHAPTER  XVII. 
Labor  Problems. 

142.  ORIGIN  OF  LABOR  PROBLEMS.  Labor  problems  are  as 
old  as  civilization.  As  soon  as  division  of  labor  had  progressed 
far  enough  to  create  a  wage-earning  class,  trouble  arose  between 
employer  and  employed,  and  if  we  had  a  more  complete  industrial 
history  of  early  ages  it  would  doubtless  reveal  more  contests  in 
the  industrial  world  than  the  few  strikes  recorded  in  early  his- 
tory. But  long,  severe,  and  widespread  warfare  between  laborers 
and  employers  is  characteristic  only  of  modern  times,  and  is  a  re- 
sult of  the  industrial  revolution  of  the  eighteenth  century. 

That  revolution  produced  at  least  four  vital  changes  in  the  in- 
dustrial world  out  of  which  changes  modern  labor  problems  grew, 
(1)  the  gap  between  laborer  and  employer  was  widened,  (2)  the 
feeling  of  unrest  among  laborers  was  intensified,  (3)  laborers  were 
gathered  together  in  large  groups  in  cities  or  in  mining  camps,  (4) 
strong  labor  unions  sprang  into  being. 

In  the  handicraft  stage  employer  and  employed  worked  to- 
gether in  the  same  little  shop  and  both  belonged  to  the  same  social 
class.  Laborer  and  employer  were  not  exactly  on  terms  of  equality, 
but  there  was  no  great  difference  between  them.  As  compared  with 
the  great  lords  who  dominated  society,  all  industrial  classes  were 
very  humble  folks.  The  chief  exceptions  to  this  were  the  few  mer- 
chant princes  and  bankers  who  arose  toward  the  close  of  the  Middle 
Ages.  Very  commonly  employer  and  laborer  were  practically  mem- 
bers of  the  same  household,  the  master  craftsman  furnishing  board 
and  lodging  to  his  half  dozen  apprentices  and  journeymen.  More- 
over, the  more  ambitious  journeymen  soon  became  employers  them- 
selves, setting  up  their  own  little  shops.  Thus  there  was  no  sharp 
line  of  distinction  between  employer  and  employed.  But  the  in- 
dustrial revolution  concentrated  the  management  of  industry  in  the 
hands  of  a  few,  and  the  mass  of  the  laborers  have  no  hopes  of  being 


214  ELEMENTS   OF   ECONOMICS 

anything  but  wage  earners,  the  employer  belongs  to  a  different 
social  class,  and  the  old  feeling  of  personal  friendship  between  em- 
ployer and  employed  has  vanished. 

Discontent  among  the  laboring  classes  would  naturally  increase 
from  these  changes.  The  great  body  of  master  craftsmen  would 
feel  humiliated  by  the  loss  of  their  industrial  independence,  and  the 
aspiring  among  the  apprentices  and  journeymen  would  feel  a  like 
disappointment.  If  these  were  the  only  changes  produced  by  the 
industrial  revolution  the  struggle  between  capital  and  labor  might 
have  ended  after  one  or  two  generations.  But  the  creation  of  a  new 
aristocracy  of  wealth  would  establish  a  permanent  barrier  between 
the  two  classes  and  make  the  struggle  permanent.  Other  changes 
added  to  the  unrest.  The  factories  were  not  as  sanitary  and  as 
pleasant  to  work  in  as  the  little  shop  of  the  handicraftsman,  and 
the  introduction  of  the  new  machinery  made  the  laborer  merely  a  part 
of  the  great  machine.  Under  the  old  system  the  workman  was  largely 
master  of  his  own  movements,  and  the  master  himself  set  the  pace. 
Under  the  new  system  the  great  steam  engine  which  runs  the 
machinery  sets  the  pace  and  the  master  sits  in  the  office  and,  from 
the  point  of  view  of  the  men  in  the  factory,  has  an  easy  time.  More- 
over, hours  of  work  became  longer  and  wages  decreased  for  a  time. 
And  even  when  wages  remained  the  same  or  slightly  increased  the 
workingmen  saw  their  employers  becoming  wealthy  and  the  feel- 
ing grew  that  laborers  were  not  getting  their  just  share  of  the 
increased  product. 

The  third  great  change  was  the  congestion  of  labor  in  great 
cities.  Many  of  the  handicrafts  thrived  best  in  the  small  villages 
where  their  raw  materials  could  easily  be  obtained  from  the  sur- 
rounding farms.  The  great  factory,  the  railroad,  and  the  steamship 
concentrated  industry  in  a  few  favored  spots,  and  local  markets  be- 
came world-markets  for  the  great  staple  products.  This  conges- 
tion of  labor  fed  the  growing  discontent,  for  it  brought  the 
discontented  together  and  enabled  them  to  talk  about  their  grievances. 


ELEMENTS  OF  ECONOMICS  215 

Dis(^ontent  thus  became  massed  in  a  few  spots  and  gained  power  by 
the  concentration. 

Out  of  such  conditions  labor  unions  developed.  Here  were  all 
the  elements  needed  to  create  such  unions.  Under  the  handicraft 
system  no  strong  unions  were  possible  among  wage  earners,  since 
the  more  intelligent  and  ambitious  among  them  expected  them- 
selves to  become  employers  of  labor.  Now  no  such  hope  exists, 
and  a  genuine  class  consciousness  would  develop.  The  permanent 
grievances  would  be  common  to  all  and  would  strengthen  the  class 
feeling  and  suggest  remedies.  Being  in  close  contact,  men  could 
talk  over  their  grievances  and  plans  of  action.  The  old  trade  gilds 
of  the  handicraftsmen  naturally  suggested  unions  of  workingmen, 
and  trade  unionism  sprang  into  life. 

143.  FORMS  OF  LABOR  ORGANIZATIONS.  There  are  four 
forms  of  labor  organizations.  The  Knights  of  Labor  type  is  an  attempt 
to  unite  all  classes  of  labor  in  one  great  union.  The  theory  was 
that  all  wage  earners  have  certain  common  grievances  and  all  ought 
to  stand  together.  But  grievances  are  common  to  call  classes  of 
labor  only  in  a  general  way.  In  practice  specific  grievances  of  one 
group  of  workers  may  be  entirely  different  from  the  grievaMces  of 
another  group,  and  other  groups  may  be  fairly  well  satisfied  with 
their  conditions.  Hence  harmony  of  action  is  impossible.  Because 
of  these  defects  the  Knights  of  Labor  never  succeeded  in  gaining  a 
large  number  of  members  and  it  long  ago  ceased  to  exist. 

Another  type  of  organization  is  the  trade  union,  in  which  mem- 
bers of  each  trade  form  a  separate  union.  In  the  building  trades 
carpenters  form  a  union,  bricklayers  another,  plasterers  another  and 
hod  carriers  another.  In  the  railway  industry,  engineers,  firemen, 
conductors,  and  brakemen  have  separate  unions.  Each  trade 
has  its  local  union,  often  a  district  or  state  union  and  usually  a 
national  union,  so  that  for  certain  purposes  members  of  a  trade 
throughout  the  whole  country  may  act  together.  They  might  for 
example  create  a  national  strike  fund  so  that  when  members  in  one 


216  ELEMENTS  OF  ECONOMICS 

part  of  the  country  are  on  a  strike  they  may  receive  help  from  the 
national  fund.  Men  on  a  strike  often  receive  half-pay  from  the 
union.  This  type  of  union  is  the  prevailing  one  in  all  countries  today 
where  labor  unions  are  found. 

A  third  type  of  organization  is  the  industrial  union,  in  which 
all  those  working  in  a  given  industry  form  one  organization.  This 
type  of  union  is  represented  by  the  Industrial  Workers  of  the  World 
which  is  a  new  organization  and  as  yet  has  comparatively  few  mem- 
bers. In  this  form  of  union  all  railway  employers  would  form  one 
union,  all  those  in  the  building  trades  another;  and  so  on.  This 
type  of  union  is  largely  the  result  of  certain  weaknesses  in  the 
trade  union.  Some  laborers  feel  that  the  struggle  with  employers 
is  apt  to  be  more  successful  if  all  the  employees  of  any  one  com- 
pany, firm,  or  individual,  stand  together  in  one  union.  If  only  one 
group  of  workers  in  any  establishment  go  on  a  strike  their  places 
could  be  filled  much  more  easily  than  if  all  the  workers  go  on  a 
strike.  By  thus  standing  together  the  industrial  union  is  a  much 
stronger  fighting  organization  than  the  trade  union.  There  are 
some  industrial  unions  not  belonging  to  the  Industrial  Workers  of 
the  World,  as  in  the  coal  mining  industry,  in  which  the  United 
Mine  Workers  include  all  classes  of  labor  in  and  around  the  mines. 

Either  of  the  last  two  types  of  union  may  be  federated  into  a 
general  union  of  the  trade  or  industrial  unions.  Thus  the  Ameri- 
can Federation  of  Labor  seeks  to  unite  all  trade  unions,  and  some 
industrial  unions.  Trade  or  industrial  unions  of  each  city  or  locality 
are  formed  into  a  local  federation  and  the  national  unions  are  joined 
in  a  national  federation.  Owing  to  the  fact  that  some  trade  unions 
have  no  national  organization,  local  unions  are  sometimes  members 
of  the  national  federation,  and  local  federations  may  also  be  mem- 
bers of  the  national  federation.  The  purposes  of  uniting  national 
trade  and  industrial  unions  into  a  federation  are  various.  Repre- 
sentatives of  all  classes  of  labor  may  meet  for  considering  broad 
general  questions  such  as  general  aims  and  the  best  means  of  ac- 


ELEMENTS   OF   ECONOMICS  217 

complishing  those  aims.     Also  the  federation  may  aid  members  on 
strike. 

144.  OBJECTS  OF  TRADE  UNIONS.  The  two  main  aims  of 
trade  unions  are  educational  and  economic.  Educational  activities 
are  mainly  the  study  of  economic  and  social  problems  by  means  of 
lectures  and  evening  classes  and  the  propagation  of  unionism  among 
the  working  classes  by  trade  union  journals.  The  American  Federa- 
tion of  Labor  publishes  a  paper  devoted  to  the  broader  interests  of 
labor  and  many  of  the  national  unions  publish  journals. 

The  second  object  or  group  of  objects  of  trade  unions  is  to  im- 
prove the  economic  conditions  of  laborers.  The  thr^e  main  economic 
aims  are  to  secure  higher  wages,  shorter  hours  and  better  condi- 
tions of  labor.  To  secure  these  aims  unions  seek  to  influence  legis- 
lation and  to  induce  their  employers  to  grant  their  demands.  It  is 
the  latter  line  of  activities  that  leads  to  labor  wars,  for  employers  in 
this  country  have  not  yet  accepted  trade  unionism  as  a  permanent 
thing.  The  means  by  which  the  unions  seek  to  extort  from  em- 
ployers the  things  they  desire  we  must  now  study  in  some  detail. 

145.  MEANS  OF  SECURING  DEMANDS.  MONOPOLY.  The 
main  means  employed  by  unions  to  get  from  employers  better  terms 
are  (1)  the  power  of  monopoly,  (2)  collective  bargaining,  (3)  the 
closed  shop,  (4)  strikes,  and  (5)  limitation  of  output. 

By  forming  a  union,  laborers  seek  to  create  a  monopoly.  Under 
modern  conditions  the  individual  laborer  bargains  with  employers 
upon  unequal  terms.  Employers  are  more  or  less  united  or  have  a 
common  understanding  as  to  wages  and  hours.  Where  laborers  are 
many  and  employers  few,  the  individual  laborer  is  practically  com- 
pelled to  accept  the  terms  offered  him  or  remain  idle,  and  if  there 
is  the  slightest  tendency  towards  an  oversupply  of  labor  of  any 
grade  wages  will  be  low,  hours  long,  and  conditions  as  to  health  and 
safety  very  undesirable,  where  the  law  does  not  sufficiently  pro- 
vide for  health  and  safety,  and  it  usually  does  not.  If,  however, 
all  laborers  in  any  trade  unite  and  agree  upon  terms  which  they 


218  ELEMENTS  OF  ECONOMICS 

will  demand  of  employers  the  situation  is  entirely  different.  If 
the  union  is  an  open  union,  being  open  for  all  in  the  trade  to  enter, 
and  if  the  demands  made  upon  employers  are  reasonable,  the  aims 
of  trade  unions  are  laudable;  but  if  the  union  is  a  closed  union  or 
if  demands  upon  employers  are  inconsistent  with  the  just  rewards  of 
capital  then  the  trade  union  is  a  thing  which  society  should  suppress. 
By  a  closed  union  is  meant  one  that  limits  the  number  of  those 
in  the  trade.  This  is  the  real  spirit  of  monopoly  which  seeks  not 
the  uplift  of  the  laboring  class  as  a  whole  but  selfishly  seeks  special 
privileges  for  the  few  who  are  allowed  to  enter  the  trade,  regard- 
less of  the  welfare  of  their  fellow  workers  in  other  trades. 

146.  JOINT  AGREEMENTS.  When  monopoly  is  secured,  then 
the  next  step  is  to  enter  into  joint  agreements,  or  collective  bargain- 
ing plans.  Representatives  of  the  laborers  and  employers  meet  in 
convention  yearly  or  at  longer  intervals  and  draw  up  elaborate 
agreements  covering  all  sorts  of  questions  concerning  which  there 
has  been  or  is  liable  to  be  disputes,  including  wages,  hours  and 
conditions  of  employment.  The  agreement  also  provides  for  the  set- 
tling of  local  disputes  about  the  application  of  the  rules  agreed 
upon,  a  common  method  being  to  appoint  a  joint  committee  com- 
posed of  representatives  of  the  laborers  and  representatives  of  the 
employer.     These  are  called  conciliation  boards,  or  shop  councils. 

The  advantages  of  this  system  are  manifest.  If  all  establish- 
ments had  such  a  system  of  joint  agreements,  labor  wars  would 
come  to  an  end.  The  chief  possible  objection  to  such  a  system  would 
be  the  tendency  to  create  monopolies  in  lines  of  business  now  com- 
petitive. All  competition  as  to  hours,  wages  or  general  conditions 
of  labor  being  eliminated,  competition  would  naturally  be  in  the 
direction  of  lower  prices  or  better  goods  or  service.  But  regular 
meetings  of  employers  in  an  industry  would  be  a  very  material 
aid  in  reaching  monopolistic  agreements  among  producers.  Joint 
agreements  between  employers  and  laborers  are  common  in  Europe 
but  in  this  country  they  are  exceptional,  American  employers  being 


ELEMENTS   OF   ECONOMICS  219 

generally  hostile  to  unions.  This  hostility  is  due  partly  to  the 
American  spirit  of  independence,  each  employer  desiring  to  do  just 
as  he  pleases  without  restrictions  as  to  union  rules.  There  are  other 
causes  of  this  hostility,  not  the  least  being  the  desire  to  maintain 
profits  undiminished;  and  it  seems  that  in  some  cases  unions  abuse 
their  power.  Unions  often  strike  for  higher  wages  when  their 
wages  are  already  four  or  five  dollars  a  day,  or  two  or  three  times 
as  much  as  unskilled  laborers  receive.  This  is  manifestly  unfair 
to  society  and  to  non-union  laborers,  who  are  usually  prevented  by 
prevailing  conditions  from  maintaining  unions,  the  labor  market  being 
oversupplied  with  unskilled  labor.  An  increase  in  the  spirit  of  fair- 
ness on  the  part  of  both  employers  and  laborers  would  materially 
improve  the  conditions  in  the  labor  world  and  lessen  strife  which 
is  so  destructive  to  all. 

147.  THE  CLOSED  SHOP.  The  closed  shop  may  mean  a  shop 
closed  to  union  labor  or  to  non-union  labor,  but  generally  it  means 
a  shop  closed  to  non-union  labor.  The  open  shop  is  one  in  which  both 
union  and  non-union  men  are  employed.  If  the  closed  shop  is  con- 
nected with  a  closed  union,  nothing  is  to  be  said  in  its  favor,  as 
it  creates  a  monopoly  of  the  worst  kind. 

Trade  unionists  claim  that  if  joint  agreements  are  to  be  entered 
into  the  closed  shop  is  necessary,  since  laborers  must  be  organized 
in  order  to  send  representatives  to  joint  meetings  and  to  joint  con- 
ciliation boards.  Also  they  urge  that  it  is  unfair  to  union  men  to 
make  them  bear  all  the  burden  of  paying  the  expense  of  maintain- 
ing the  union  and  let  non-union  men  have  the  benefits  of  the  union. 

Various  objections  are  made  to  the  closed  shop.  It  is  claimed 
that  it  is  a  means  of  coercing  non-union  men  against  their  will,  that 
it  robs  the  American  workingman  of  his  natural  right  to  work  where 
he  will  and  for  such  wages  and  under  such  conditions  as  he  may 
choose  to  accept.  Unionists  contend,  on  the  other  hand,  that  such 
liberty  is  no  liberty  at  all  except  that  of  being  a  slave,  and  that  the 
unionist  has  a  right  to  decide  with  whom  he  will  work  and  under 


220  ELEMENTS  OF  ECONOMICS 

what  conditions. 

Court  decisions  on  "closed  shop"  contracts  are  conflicting,  some 
holding  that  such  contracts  are  legal  and  not  contrary  to  the  spirit 
of  American  freedom,  especially  freedom  of  contract.  On  the  other 
hand,  some  court  decisions  go  so  far  as  to  deny  an  employer  the 
right  voluntarily  to  enter  into  such  a  contract  because  it  violates  his 
own  freedom  of  making  a  different  contract  with  non-union  men* 
This  seems  the  height  of  absurdity.  This  reasoning  would  destroy 
all  contracts,  since  a  contract  restricts  both  contracting  parties  in 
their  power  to  make  contracts  contrary  to  the  terms  agreed  upon^ 
All  contracts  limit  our  power  of  making  other  contracts. 

Not  a  little  of  the  opposition  to  the  closed  shop  is  due  to 
the  unfair  means  used  by  union  men  in  practically  forcing  men  into 
the  union.  The  non-union  man  is  made  to  feel  disagreeable  in  every 
conceivable  way.  He  is  made  a  social  outcast,  is  called  a  scab,  and 
all  sorts  of  tricks  are  played  upon  him.  If  the  non-union  men  were 
won  over  by  persuasion  and  agreement,  trade  unionism  would  seem 
more  desirable  at  least  to  the  public. 

148.  STRIKES.  When  unions  fail  to  secure  their  demands  from 
employers,  the  common  weapon  is  the  strike.  It  would  seem  that 
strikes  are  increasing  in  recent  years,  though  no  reliable  figures 
are  available.  Every  year  there  are  hundreds  of  local  labor  wars 
and  usually  there  are  two  or  three  on  a  vast  scale  involving  large 
numbers  of  men  and  the  loss  in  wages  runs  up  into  the  millions 
of  dollars.  During  the  first  half  of  the  year  1913  there  were  195 
strikes  in  New  York  State  alone,  and  124,573  employees  were  di- 
rectly concerned.  During  the  same  year  occurred  the  strike  of  the 
workers  in  the  silk  industry  at  Paterson,  New  Jersey.  About  25,000 
employees  were  involved  and  it  is  estimated  that  their  loss  in  wages 
amounted  to  $5,000,000.  In  the  same  year  a  bitter  labor  war  raged 
in  West  Virginia  in  the  coal  mining  industry,  the  strike  resulting 
in  a  victory  for  the  miners,  after  the  loss  of  over  $2,000,000  and 
13  lives.    In  1914  also  occurred  the  great  Calumet  copper  mine  strike 


ELEMENTS  OF  ECONOMICS  221 

in  Michigan,  and,  most  notable  of  all,  the  Colorado  coal  miners'  strike. 

Men  have  a  legal  right  to  strike.  But  strikes  are  usually  at- 
tended with  violence,  lawlessness  and  often  murder.  Employers  im- 
port strike  breakers,  "scabs"  the  strikers  call  them,  and  often  employ 
armed  guards  to  protect  the  strike  breakers.  These  strike  break- 
ers are  often  professional  strike  breakers,  daring,  lawless  men,  in- 
tensely hated  by  the  strikers.  The  presence  of  such  men  and  of 
armed  guards,  who  are  often  armed  ruffians,  naturally  leads  to  a 
conflict  with  the  strikers,  and  real  war  follows.  Often  the  state 
militia  are  called  in  to  put  down  the  disorders  and  sometimes  the 
disturbance  gets  beyond  the  control  of  the  state  militia  and  federal 
troops  are  called  in,  as  in  the  Colorado  strike. 

Moreover,  the  public  is  seriously  injured  in  other  ways  by  these 
labor  wars.  In  case  of  a  street  car  strike  the  entire  transportation 
system  of  a  city  may  be  paralyzed  for  months,  to  the  great  incon- 
venience of  the  people.  In  a  coal  strike  a  coal  famine  inflicts  great 
hardships  and  sufferings  upon  perhaps  millions  of  people.  With 
the  present  organization  of  industry,  each  group  of  laborers  has 
moral  obligations  to  fulfill,  and  all  are  in  duty  bound  to  have  due 
regard  to  the  interests  of  the  other  workers  who  are  supplying  them 
with  their  means  of  living.  Hence,  laborers  should  not  enter  into  a 
strike  upon  slight  provocation.  Unfortunately  they  often  plunge  into 
these  labor  wars  when  they  are  receiving  much  better  wages  than 
the  mass  of  the  workers  and  when  there  is  no  serious  grievance. 
But  the  public  has  rights  in  the  matter.  It  is  because  the  public 
has  rights  that  there  is  a  growing  demand  for  compulsory  arbitra- 
tion in  labor  disputes. 

149.  LIMITATION  OF  THE  OUTPUT.  Another  means  used  to 
some  extent  by  trade  unions  to  increase  wages  is  to  decrease  the 
output  per  man.  To  what  extent  this  practice  prevails  is  not  defi- 
nitely known,  as  no  thorough  investigation  has  been  undertaken.  Em- 
ployers assert  that  it  is  quite  prevalent.  Sometimes  union  rules  limit 
the  amount  of  work  a  member  shall  do  in  a  day  and  sometimes  a 


222  ELEMENTS  OF  ECONOMICS 

common  understanding  accomplishes  the  same  purpose.  In  some 
cases  the  amount  of  work  prescribed  by  the  union  or  the  maximum 
amount  accomplished  by  a  common  understanding  is  not  one-half 
an  honest  day's  work. 

The  reasons  for  this  limitation  of  output  are  mainly  two,  and 
these  are  powerfully  assisted  by  laziness  which  is  characteristic  of 
most  people  when  there  is  no  special  incentive  to  long  and  sustained 
hard  work.  One  reason  is  the  effort  to  offset  the  tendency  of  em- 
ployers to  speed  up.  In  case  piece  wages  are  paid,  employers  often, 
select  their  fastest  workman,  ascertain  the  amount  of  his  work,  and 
make  the  piece  rates  such  that  the  pace-setter  makes  only  a  fair 
day's  wage.  This  will  automatically  reduce  the  rates  of  the  slower 
workmen  below  a  decent  living  standard.  Another  reason  for  lim- 
iting the  output  is  a  false  theory  of  wages.  Workingmen  believe 
that  if  each  man  does  less  work,  demand  for  labor  will  increase  and 
the  rate  of  wages  will  rise. 

Is  this  limitation  of  output  justifiable  or  beneficial  to  the  labor- 
ing classes?  In  case  it  is  done  to  prevent  the  unjust  and  inhuman 
practices  of  speeding  up  machinery  beyond  reason  or  of  reducing 
wages  below  a  decent  standard  by  the  selection  of  a  pace-setter,  a 
limitation  of  the  output  is  commendable,  provided  it  is  not  carried 
to  the  other  extreme  of  reducing  the  day's  work  below  a  fair  amount 
for  the  ordinary  man.  If  only  a  few  unions  limit  output  it  might 
be  beneficial  to  them  by  creating  a  larger  demand  for  that  class  of 
labor.  But  if  all  workmen  should  limit  the  output  all  would  be  in- 
jured, because  high  real  wages  cannot  be  paid  unless  there  is  a  large 
product  per  man.  If  fewer  things  were  produced  all  around,  there 
would  be  less  to  distribute,  and  consequently  prices  would  be  higher 
and  real  wages  lower.  Trade  unions  make  two  mistakes,  first  that 
demand  for  labor  would  remain  the  same  if  output  is  limited  and 
second  that  prices  would  also  remain  the  same.  Thus,  when  a  few 
trade  unions  limit  the  output,  they  injure  all  other  laborers  who  con- 
sume these  products.     In  this  matter  we  have  another  illustration 


ELEMENTS  OF  ECONOMICS  223 

of  the  need  of  sound  knowledge  of  economics  among  workingmen. 

150.  COMPULSORY  ARBITRATION.  Out  of  the  disorders  and 
inconveniences  to  the  public  resulting  from  strikes  has  grown  a 
demand  for  compulsory  arbitration.  There  is  a  growing  conviction 
that  the  public  has  rights  as  well  as  laborers  and  employers,  and  we 
are  beginning  to  realize  that  production  .is  a  social  process  in  which 
all  producers  are  partners.  There  is  a  growing  feeling,  therefore^ 
that  laborers  and  employers  have  no  moral  right  to  plunge  into  an 
industrial  war  to  the  injury  of  the  general  public  unless  the  situation 
is  desperate,  and  that  public  authority  has  a  right  and  is  in  duty 
bound  to  prevent  such  labor  wars. 

In  response  to  this  conviction  compulsory  arbitration  has  been 
inaugurated  in  some  countries,  notably  Australia.  Seemingly  it 
has  worked  well  in  foreign  countries,  the  success  of  this  new  ven- 
ture by  the  government  being  partly  due  to  the  power  of  fixing  a 
minimum  wage.  In  Australia  failure  to  accept  the  award  of  the 
board  of  arbitration  leads  to  severe  punishment  by  the  state. 

In  this  country  it  would  seem  difficult  to  apply  the  theory  of 
compulsory  arbitration  because  individualism  and  ideas  of  personal 
liberty  are  firmly  imbedded  in  our  national  and  state  constitutions 
and  permeate  all  our  thinking.  Any  law  that  would  take  away  the 
right  of  laborers  to  quit  work,  individually  or  collectively,  or  that 
would  force  them  to  work  under  conditions  they  did  not  like  would 
quickly  meet  a  judicial  veto  on  the  ground  that  it  violated  the  state 
or  national  constitution.  Nor  would  any  attempt  to  amend  our  funda- 
mental laws  lessening  personal  liberty  in  these  respects  be  likely  to 
meet  with  approval. 

Because  of  these  constitutional  limitations  compulsory  arbitra- 
tion is  impossible  in  the  United  States.  Voluntary  arbitration  is 
being  applied,  however,  with  some  success.  The  National  Depart- 
ment of  Labor  is  empowered  to  offer  its  services  in  case  of  labor 
troubles  and  many  labor  disputes  have  been  arbitrated.  The 
amended  Erdman  Act  (1913)  also  provides  for  a  Board  of  Mediation 


224  ELEMENTS  OF  ECONOMICS 

and  Conciliation  which  may  offer  its  services  in  preventing  or  end- 
ing strikes.  By  this  act  also  a  special  board  of  arbitration  may  be 
selected,  two  members  being  selected  by  the  laborers,  two  by  the 
employers,  and  two  by  these  four.  The  award  has  no  legally  bind- 
ing force,  but  thus  far  several  strikes  have  been  prevented  by  this 
plan  of  voluntary  arbitration.  Whether  or  not  voluntary  arbitra- 
tion will  become  an  effective  means  for  preventing  industrial  war- 
fare in  the  United  States  remains  to  be  seen. 

151.  PROFIT-SHARING.  Profit-sharing  holds  out  promises 
for  the  solution  of  the  labor  problem  along  different  lines  from  those 
offered  by  trade  unions.  Profit-sharing  hopes  to  increase  wages 
and  prevent  industrial  warfare  by  uniting  laborers  and  employers 
in  bonds  of  sympathy  and  good  will.  It  is  a  highly  altruistic  plan 
which  is  designed  to  appeal  to  the  better  side  of  human  nature. 
Trade  unionism  seeks  ultimately  to  join  laborers  and  employers  to- 
gether through  collective  bargaining  plans;  but  even  in  its  ulti- 
mate form  the  spirit  of  contest  is  present,  each  side  struggling  to 
get  the  best  of  the  bargain. 

The  possible  advantages  of  profit-sharing  are  that  the  laborers 
will  be  interested  in  the  success  of"  the  business,  will  do  a  fair 
day's  work,  and  will  be  more  careful  and  painstaking,  and,  being 
thus  partners  in  the  undertaking,  the  spirit  of  strife  will  be  elimin- 
ated. Unfortunately,  most  employers  who  have  tried  the  plan  are 
unwilling  to  give  labor  a  very  large  share  of  the  profits,  and  the 
regular  wages  still  constitute  the  main  source  of  the  laborer's  in- 
come. Hence,  if  regular  wages  are  low,  the  temptation  to  strike  to 
increase  them  still  remains.  It  also  seems  true  that  most  men 
are  stimulated  more  by  the  fear  of  the  loss  of  their  position  than  by 
the  reward  of  a  slightly  increased  wage.  Moreover,  in  times  of  in- 
dustrial reverses  when  profits  fall  and  the  share  going  to  labor 
decreases  or  disappears  altogether,  laborers  are  dissatisfied.  On 
the  whole,  there  seems  little  prospect  of  the  labor  problem  being 
solved    by    profit-sharing.      Until     human     nature     is     considerably 


ELEMENTS  OF  ECONOMICS  225 

changed,  profit-sharing  will  remain  a  minor  factor  in  the  indsutrial 
world.  A  few  high  minded  employers,  filled  with  enthusiasm  for 
the  scheme,  gather  around  them  workmen  of  superior  intelligence 
and  equally  enthusiastic  and  make  a  success  of  it.  But  they  are 
very  few. 

152.  COOPERATION.  Another  method  of  solving  the  labor 
problem  is  through  productive  cooperation  among  laborers  by  which 
the  employer  is  eliminated.  The  cooperative  movement,  started  in 
England  a  century  ago,  held  out  high  hopes  to  the  laboring  man.  By 
becoming  their  own  employers  laborers  expected  to  get  regular  wages 
plus  the  profits  of  the  employers.  Many  attempts  were  made  to 
establish  cooperative  work  shops,  but  they  universally  failed,  chiefly 
because  of  the  difficulty  of  securing  sufficient  capital  and  able  man- 
agement and  the  feeling  among  the  workers  that  they  were  owners 
of  the  establishment  and  each  man  was  his  own  boss,  which  feeling 
prevented  effective  organization  and  direction  of  the  workers. 
Finally  a  new  plan  was  devised  known  as  the  Rochdale  plan,  by 
which  laborers  cooperated  in  buying  the  goods  for  their  final  con- 
sumption, that  is,  they  set  up  retail  cooperative  stores.  In  1844  a 
little  store  was  opened  on  one  of  the  back  streets  of  Rochdale,  Eng- 
land, on  the  cooperative  plan.  Goods  were  sold  at  regular  market 
prices  but  member  customers  received  dividends  from  profits,  divi- 
dends being  in  proportion  to  amount  of  goods  purchased.  The  plan 
succeeded  and  other  cooperative  retail  stores  sprang  up  all  over 
England  and  Scotland.  Then  retail  stores  combined  and  established 
wholesale  stores,  and  the  profits  of  the  wholesaler  were  saved  by 
the  members  of  the  retail  stores.  The  cooperative  idea  was  applied 
still  further  by  the  wholesale  stores  combining  to  establish  fac- 
tories to  save  the  profits  of  the  manufacturer.  As  a  result  of  this 
movement  the  majority  of  the  working  men  in  England  and  Scotland 
buy  the  majority  of  their  goods  at  their  own  cooperative  stores  and 
thus  reduce  the  cost  of  living  about  twenty  or  thirty  per  cent.  In 
order  to  do  this,  it  was  found  necessary  to  establish  the  principle 


226  ELEMENTS   OF   ECONOMICS 

that  no  employee  can  have  any  voice  in  the  establishment  in  which 
he  works,  though  he  may  have  a  voice  in  the  management  of  other 
establishments  in  the  great  cooperative  system. 

This  cooperative  plan  has  spread  to  other  countries  of  western 
Europe  and  is  slowly  beginning  in  this  country  notably,  in  the  North- 
west among  the  Scandinavian  elements  who  brought  the  idea  from 
their  native  lands.  Other  forms  of  cooperation  are  also  spreading, 
but  these  are  "among  those  already  producers,  not  laboring  men.  In 
fact  most  of  the  co-operative  enterprises  in  the  United  States  are 
not  connected  with  the  laboring  classes  and  are  not  solutions  to  the 
labor  problem.  Farmers  have  established  cooperative  creameries  and 
elevators,  fruit  growers  have  established  cooperative  marketing,  and 
other  enterprises  are  springing  up.  Unfortunately  these  undertak- 
ings are  intended  to  enhance  the  profits  of  farmers  and  fruit  grow- 
ers not  only  by  introducing  better  marketing  methods  but  by  arti- 
ficially raising  prices.  Instead  of  being  a  solution  of  the  labor  prob- 
lem the  American  cooperative  movement  is  partly  detrimental  to 
the  laboring  classes. 

Cooperation  among  laborers  seems  to  have  its  limitations,  among 
them  being  lack  of  capital  and  skilled  management.  The  great  coop- 
erative stores,  mills,  and  factories  of  Europe  are  run  with  much  ability, 
but  they  confine  themselves  to  the  great  staple  products  which  have 
a  wide  demand  and  where  the  freaks  of  fashion  play  little  part.  At 
most,  cooperation  seems  able  only  to  make  wages  go  a  little  further, 
and  if  wages  are  very  low  cooperation  does  not  solve  the  labor  problem. 

153.  LABOI^  LEGISLATION.  One  of  the  means  employed  by 
trade  unions  and  their  friends  to  secure  better  conditions  of  labor 
is  to  influence  legislation,  and  the  trade  union  world  seeks  not  only 
to  elect  men  favorable  to  labor  but  to  influence  legislation  by  the 
same  means  capitalists  employ,  lobbying.  Thus  far  state  laws  have 
attempted  to  compel  employers  to  provide  for  the  health  and  safety 
of  their  employers,  and  in  some  trades  where  unions  are  strong 
these  laws  are  fairly  satisfactory.     But  in   some  cases,  as  in  coal 


ELEMENTS   OF   ECONOMICS  227 

mines,  much  is  yet  needed  in  this  direction,  the  loss  in  life  being 
much  greater  than  it  need  be.  In  industries  in  which  there  is  no 
strong  union,  conditions  are  far  from  ideal,  and  some  of  the  gar- 
ment making  establishments  and  similar  industries  are  regular  fire 
traps. 

One  topic  receiving  much  attention  of  late  is  the  reform  of  em- 
ployer's liability  laws.  The  old  liability  laws  were  based  upon  the 
theory  that  employers  were  not  liable  to  pay  damages  for  the  in- 
jury or  death  of  employees  unless  it  could  be  proved  that  the  em- 
ployers were  directly  to  blame;  and  the  injured  person  or  his  family 
must  bring  suit  against  the  employer.  This  imposes  a  hardship 
on  the  laborers,  for  lawyers*  fees  are  heavy  and  in  many  indus- 
tries where  jurors  are  mostly  employees  of  the  defendant  or  of  his 
friends,  the  injured  party  is  apt  to  lose  his  case  because  jurors 
are  afraid  to  bring  in  a  verdict  against  their  employers.  As  a  con- 
sequence, the  usual  decision  is,  unavoidable  accident.  But  there 
is  a  growing  feeling  that  this  situation  is  unjust  and  that  liability 
laws  should  automatically  give  compensation  for  injuries  without 
the  laborer  having  to  bring  suit,  and  that  if  employers  wish  to  con- 
test the  payment  of  damages  on  the  ground  that  the  accident  was 
the  result  of  willful  negligence  of  the  employee,  they  must  do  so 
at  their  own  cost.  This  growing  feeling  that  liability  laws  should 
be  thus  reformed  springs  from  the  belief  that  the  dangers  of  mod- 
ern industry  should  be  a  general  charge  upon  the  cost  of  produc- 
tion to  be  born  by  consumers  and  not  by  the  families  of  the  injured 
or  killed.  A  few  states  are  amending  their  employers'  liability  laws 
in  this  direction. 

Thus  far  little  has  been  done  by  legislation  to  limit  the  hours 
of  labor  or  to  raise  wages.  This  is  partly  due  to  the  theory  of  free- 
dom of  contract,  previously  referred  to.  But  the  freedom  of  con- 
tract of  the  individual  laborer  is  a  fiction  because  of  several  pecul- 
iarities of  labor.  First,  the  laborer  and  his  product  are  inseparable 
and   hence    the   laborer    must    often    accept   very   undesirable    condi- 


228  ELEMENTS   OF   ECONOMICS 

tions  or  not  work  at  all.  In  the  second  place,  labor  is  a  perishable 
commodity,  so  to  speak.  It  cannot  be  held  in  reserve  and  sold  later 
at  a  better  price,  for  a  day's  labor  lost  is  lost  forever.  In  other 
words,  the  laborer  must  constantly  work  or  his  income  ceases.  In 
the  third  place,  the  supply  of  labor  is  not  readily  adjusted  to  the 
demand,  as  in  the  case  of  an  ordinary  commodity;  hence  an  over- 
supply  may  force  wages  down.  But  in  spite  of  low  wages,  long 
hours  or  unsatisfactory  conditions  the  laborer  must  work  or  beg  or 
starve,  and  many  nearly  starve  when  they  do  work.  Hence  th^ 
theory  of  the  freedom  of  contract  is  a  fiction. 

This  old  fiction,  however,  together  with  our  individualism,  has 
thus  far  prevented  our  lawmaking  bodies  from  aiding  labor  by 
limiting  hours  or  raising  wages.  In  a  few  cases  laws  have  been 
passed  and  sustained  by  the  courts  limiting  hours  of  labor  in  cer- 
tain industries  where  long  hours  endanger  the  health  of  the  laborer 
or  the  safety  of  the  public.  Limitation  of  hours  of  railway  train 
crews  is  an  illustration  of  the  latter  kind  of  laws.  Our  courts  for 
many  years  were  more  conservative  than  legislatures  and  many 
laws  designed  to  benefit  labor  and  protect  the  public  were  declared 
unconstitutional  because  they  violated  the  freedom  of  contract.  Of 
late  years,  however,  under  severe  criticism  of  the  press  our  courts 
are  taking  more  progressive  views  and  are  sustaining  many  kinds 
of  laws  that  were  formerly  declared  unconstitutional. 


ELEMENTS   OF   ECONOMICS  229 

CHAPTER   XVIII. 
Socialism. 

154.  SOCIALISM  DEFINED.  Socialism  represents  the  radical 
element  of  discontent  and  the  remedy  offered  for  the  ills  of  society 
is  the  most  radical  known.  What  socialism  proposes  is  (1)  public 
ownership  and  management  of  all  productive  property,  (2)  public 
management  of  the  distribution  of  the  social  income,  and  (3)  pri- 
vate ownership  of  incomes  and  consumers*  goods  purchased  with 
wages  received.  In  other  words,  there  is  to  be  no  private  business. 
Private  property  in  many  things  will  exist,  but  no  one  can  engage  in 
business  for  commercial  gain.  Some  inequality  thus  would  be  allowed, 
for  accumulated  durable  property  such  as  houses  might  be  handed 
down  from  one  generation  to  another.  But  all  would  be  servants  of 
the  state  and  all  would  have  to  work  for  a  living,  until  the  old  age 
limit  would  be  reached,  for  no  matter  how  much  property  one  might 
inherit,  it  could  not  be  used  to  gain  a  profit,  though  it  might  be 
sold  and  thus  squandered. 

155.  ORIGIN  AND  GROWTH.  The  Industrial  Revolution  pro- 
duced modern  socialism.  Ideas  of  socialism  are  as  old  as  Greek 
civilization,  but  until  the  nineteenth  century  these  ideas  were  held 
by  a  few  only.  But  the  socialism  of  the  present  is  a  mighty  force. 
The  same  conditions  that  produced  trade  unionism  also  produced 
socialism,  the  more  conservative  among  the  discontented  placing  their 
hopes  in  the  strength  of  union  among  laborers  to  secure  what  they 
desired;  the  more  radical  among  the  discontented  turned  to  socialism 
and  proposed  to  abolish  the  distinction  between  employer  and  em- 
ployed. 

Rapid  growth  in  political  power  dates  from  about  1830,  in  Eu- 
ropean countries,  the  mass  of  the  people  having  little  power  before 
that  time.  In  some  countries  the  socialists  are  the  strongest  party 
in  the  legislatures,  but  in  none  have  they  yet  secured  a  majority. 
Their  numbers  are  rapidly  increasing,  however,  their  voting  strength 


230  ELEMENTS   OF   ECONOMICS 

in  the  27  leading  nations  rising  from  10  millions  in  1913  to  11  millions- 
in  1914.  In  the  United  States  the  movement  is  also  growing,  the 
socialist  strength  being  represented  by  a  million  votes.  Among  our 
working  classes  there  is  a  strong  leaning  towards  socialist  doc- 
trines, and  many  are  really  socialists  who  do  not  call  themselves 
such.  The  most  active  branch  of  the  socialists  in  this  country  are 
the  Industrial  Workers  of  the  World.  Their  leaders  are  constantly 
watching  for  a  chance  to  stir  up  strife  between  laborers  and  em- 
ployers, and  some  of  the  most  important  strikes  of  the  last  two 
or  three  years  have  been  conducted  by  the  I.  W.  W.  Their  motto 
seems  to  be,  strike  whenever  you  can  and  as  long  as  you  can,  and 
thus  wear  out  the  employers  and  make  them  glad  to  turn  over  their 
capital  to  society,  thus  inaugurating  socialism.  This  brief  view  of 
the  growth  of  modern  socialism  will  show  us  the  extent  of  the 
movement  and  the  grave  problem  presented  to  us.  That  problem  is,. 
Shall  we  tear  down  our  industrial  structure  and  build  it  all  over 
again?  We  must  answer  that  question  one  way  or  the  other,  for 
the  movement  is  upon  us. 

156.  CHARGES  AGAINST  CAPITALISM.  There  are  three  ser> 
ious  charges  socialists  bring  against  capitalistic  society,  (1)  the 
laboring  men  are  robbed  of  a  large  part  of  their  product,  (2)  this 
leads  to  a  perpetual  struggle  between  capital  and  labor,  and  (3> 
capitalistic  production  is  planless  and  wasteful.  These  charges  are 
bound  up  with  the  socialists'  theory  of  modern  economics.  They 
hold  that  labor,  being  the  only  active  agent,  creates  the  whole 
product.  Capital  helps  to  be  sure,  but,  they  say,  since  labor  pro- 
duces the  capital,  the  whole  product  is  due  to  labor.  The  present 
organization  of  industry  robs  the  laborer  of  most  of  his  product, 
and  the  two  chief  robbers  are  the  rent  receiver  and  the  interest 
receiver,  because  they  are  purely  economic  parasites,  since  neither 
contribute  anything  to  society.  But  since  they  own  two  of  the  in- 
struments of  production  they  can  levy  tribute  upon  the  remainder 
of  society.     The  employer  or  profits  receiver  also  robs  labor  by  the 


ELEMENTS   OF  ECONOMICS  23L 

"iron  law^'  of  wages.  This  iron  law,  is,  briefly  stated,  the  law  of 
Malthus.  The  increase  in  population  constantly  keeps  wages  down 
to  the  minimum  of  subsistence,  no  matter  how  much  power  man  gains 
over  nature.  Hence  the  laborer  is  always  on  the  verge  of  starva- 
tion while  'the  rich  are  growing  richer. 

But  laborers  are  Becoming  more  intelligent  through  universal 
education  and  are  beginning  to  recognize  their  rights  and  are  strug- 
gling to  secure  a  larger  share  of  the  product.  This  struggle  is  bound 
to  last  as  long  as  capitalism  lasts,  because  the  three  robbers  wish 
to  maintain  their  aristocratic  positions  and  will  always  refuse  to 
give  the  laborer  even  a  fair  share  of  the  product,  and  on  the  other 
side,  thie  growing  intelligence  of  labor  will  make  it  more  powerful 
and  more  unyielding  in  its  demands.  Thus  the  struggle  will  con- 
tinue until  capitalism  is  abolished. 

In  the  third  place,  say  the  socialists,  the  present  system  is  plan- 
less and  wasteful.  The  producers  merely  guess  at  the  amount  needed 
by  society,  each  producer  struggling  to  sell  all  he  can.  No  one 
plans  the  production  so  as  to  meet  all  the  needs  of  all  the  people.  .In 
marketing  there  is  again  much  waste  in  advertising,  in  cross-ship- 
ments, in  retailing. 

157.  CRITICISMS.  There  is  no  doubt  of  the  fact  that  there 
is  much  truth  in  the  socialists*  charges  against  modern  industry;  but 
parts  of  their  theory  are  false  and  the  remedy  they  propose  may 
be  like  jumping  out  of  the  frying  pan  into  the  fire.  In  the  first 
place,  it  may  be  true  in  a  sense  that  labor  produces  the  whole 
product,  since  it  produces  the  capital  and  gets  the  land  in  shape  for 
production.  But  that  is  a  different  proposition  from  what  the 
socialists  mean,  which  is,  that  the  wage  earning  classes  produce  the 
whole  product.  Saving  is  an  essential  part  of  the  process  of  cre- 
ating capital;  but  the  wage  earners  have  not  been  the  ones  who  have 
saved,  else  they  would  have  been  the  capitalists  and  landlords.  Also, 
the  work  of  management  is  as  truly  productive  as  manual  labor,  and 
wage  earners  cannot  claim  that  the  active  capitalists,  the  employer,. 


232  ELEMENTS   OP   ECONOMICS 

does  not  produce  a  part  of  the  product.    It  is  not  true,  therefore,  that 
wage  earners  create  the  whole  product. 

In  the  second  place,  there  is  no  iron  law  of  wages.  The  social- 
ists have  misinterpreted  the  law  of  Malthus.  By  the  right  interpre- 
tation of  that  law  man  is  master  of  his  own  destiny.  If  laborers 
will  but  use  good  judgment  there  will  be  no  oversupply  of  labor;, 
and  the  middle  and  upper  ranks  of  labor  have  enjoyed  a  considerable 
share  of  the  improvements  in  modern  industry.  With  proper  educa- 
tion, general  and  industrial,  the  oversupply  of  unskilled  labor  will 
be  checked  and  the  present  degraded  condition  of  unskilled  labor  will 
be  improved. 

In  the  third  place,  labor  wars  will  not  necessarily  continue.  In 
some  countries  where  the  state  has  stepped  in  to  regulate  these  wars 
they  are  becoming  a  thing  of  the  past.  If  society  can  take  over  the 
whole  industrial  process,  production  and  distribution  and  all,  it  surely 
can  superintend  a  part  of  the  process  when  things  are  not  running 
smoothly. 

.In  the  fourth  place,  there  is  plenty  of  industrial  waste.  But 
in  this  struggle  to  satisfy  the  wants  of  society  lies  the  progress  of 
the  race  along  industrial  lines.  Much  of  the  waste  may  be  elimin- 
ated by  wise  social  cooperation.  By  good  banking  systems  panics 
can  be  minimized;  by  proper  regulation  of  monopoly,  including  the 
regulation  of  prices,  much  harm  can  be  prevented,  still  leaving  room 
for  private  initiative.  More  social  control  may  prove  effective,  and 
render  unnecessary  the  radical  remedy  of  socialism.  Even  now  the 
marketing  problem  is  being  attacked  and  on  every  hand  the  spirit  of 
cooperation  and  helpfulness  is  beginning  to  get  possession  of  the 
governments  of  the  world,  and  there  is  no  reason  to  believe  that 
society  cannot  cooperate  to  correct  social  ills  as  well  under  capital- 
ism as  under  socialism,  without  encountering  the  dangers  of  gov- 
ernment ownership  and  management  of  every  industry  and  without 
losing  the  advantages  of  private  initiative  and  enterprise. 

158.  SOCIALIST  PRODUCTION.     It  would  appear  that  social- 


ELEMENTS   OF   ECONOMICS  233 

ists  propose  to  retain  the  general  organization  of  productive  enter- 
prises now  existing,  but  they  will  be  directed  by  committees  or  com- 
missions of  the  government.  The  hiring  of  labor,  deciding  what  to 
produce,  how  much  to  produce  and  prices  to  charge  must  all  be  de- 
termined. Now  the  question  arises.  Will  everything  run  smoothly, 
or  will  there  be  more  trouble  for  society  under  socialism  than  under 
social  control  of  private  industry? 

The  first  suggestion  that  arises  is.  Who  will  decide  what  each 
man  shall  do  in  this  industrial  Eden?  Will  each  man  decide  for  him- 
self or  will  the  government  decide  for  each  man?  If  each  man 
decides  for  himself  the  government  will  be  confronted  with  the  prob- 
lem of  finding  work  for  men  when  it  does  not  need  them,  for  there 
is  no  assurance  that  the  number  choosing  a  certain  line  of  work 
will  be  in  proportion  to  the  number  needed.  In  that  case  the  gov- 
ernment Would  be  forced  to  take  all  who  offer  themselves,  for  under 
socialism  the  government  would  be  absolutely  compelled  to  employ 
all  who  want  work,  and  that  includes  all  but  the  young  or  the  aged, 
for  there  is  to  be  no  private  business.  And  suppose  men  "soldier 
on  the  job?"  Who  is  to  compel  them  to  work?  On  the  other  hand, 
if  the  government  decides  what  each  man  shall  do,  the  thing  reduces 
itself  to  slavery. 

It  is  necessary  to  point  out  the  marked  difference  between  gov- 
ernment ownership  of  a  few  industries  and  government  ownership  of 
all  industries.  In  the  former  case  the  government  is  under  no  obli- 
gation to  employ  all  who  offer  themselves,  but  it  can  select  whom 
it  wishes,  at  wages  measured  by  prevailing  rates  in  private  business, 
and  if  employees  prove  really  unfit,  they  can  be  dismissed. 

Before  we  adopt  socialism  it  will  be  well  to  think  seriously  of 
these  matters  and  decide  whether  or  not  the  remedy  offered  for 
social  diseases  may  not  make  those  diseases  worse  or  else  bring 
other  and  more  serious  disasters  upon  us.  Until  it  can  be  shown  that 
the  majority  of  mortals  are  unselfish,  strictly  honest,  and  anxious 
to   work   for   the    general   welfare,    socialism    will   not   improve    the 


234  ELEMENTS   OF   ECONOMICS 

material  welfare  of  the  race;  and  when  the  time  comes  that  most 
men  are  ideal  men  there  will  be  no  social  ills  for  socialism  to  remedy. 

159.  SOCIALIST  DISTRIBUTION.  Socialists  are  not  agreed  on 
their  plan  of  distribution,  that  is,  on  their  wage  scale,  but  several 
plans  have  been  suggested.  One  is  equal  pay  for  all.  This  plan 
would  manifestly  be  disastrous,  for  it  would  offer  no  reward  for  su- 
perior merit  or  ability,  and  hence  the  spur  to  advancement  of  society 
would  be  lacking. 

Another  plan  is  pay  in  proportion  to  needs.  But  what  is  the 
test  of  needs?  If  it  is  the  size  of  the  family,  the  increase  in  popu- 
lation would  ere  long  impoverish  the  whole  race. 

Others  advocate  pay  according  to  merit.  Theoretically  this  plan 
looks  workable.  But  what  is  to  be  the  test  of  merit?  According 
to  present  day  standards  among  day  laborers,  mental  labor  is  ranked 
little  above  manual  labor.  Unless  mental  achievements  are  rated 
above  the  physical,  the  progress  of  the  race  is  doomed,  for  if  mental 
effort  is  not  rewarded  above  the  physical,  and  considerably  above  it, 
few  will  struggle  through  the  years  of  study  necessary  to  prepare 
for  high  intellectual  work. 

Thus  when  we  look  closely  at  the  plans  of  distribution  offered 
l)y  the  socialists  we  see  that  each  has  its  serious  dangers.  And  so 
many  possible  dangers  are  presented  by  socialism  that  it  would  seem 
unwise  to  adopt  it  until  we  have  more  thoroughly  tested  less  radical 
jneans  of  curing  the  evils  in  industrial  society. 


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